Investor Letters

Investor Letters

This edition is LOADED with investor letters as we clear the deck for one of our favorites: Scott Miller. We’ll touch on some other things, such as a trader turning $700 into $100K+. Artko Capital continues to kill it. And Howard Marks discusses negative rates.

Q3 2019 hedge fund letters, conferences and more

But we’re saving room for what matters most, fresh ideas.

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October 23, 2019

Size Matters: Last week’s trivia prize was a shout-out and $1 Venmo from yours truly. We received a lot of feedback from last week’s Value Hive and the winner is … *drumroll please*

NOBODY!

That’s right. Nobody emailed the correct answer to last week’s question. That means we’re going double or nothing. Yep. Two whole dollar bills and two week’s worth of shoutouts is up for grabs. Here’s the question: What is the world record for the largest pumpkin ever grown?

House rules, no Google! Good luck!


Investor Spotlight: Scott Miller Likes SPACs and South Africa

Early last week, Scott Miller released his Q3 Investors Letter. Miller — who runs Greenhaven Road Capital — returned a hair below 1% for the quarter. Astute Value Hive readers know we don’t care about short-term performance.

We agree with Miller on this one. Quarterly performance is a blip on the long-term radar.

Before we dive into Miller’s new investments, let’s glance at his top four holdings (thesis descriptions are taken from letter, not my opinion):

  1. KKR & Co. (KKR)
    • Miller’s Thesis: A strong balance sheet with $17+/share in cash and investments. A sub 6x distributable earnings valuations. Conservative accounting, high insider ownership and strong secular tailwinds.
  2. Digital Turbine (APPS)
    • Miller’s Thesis: Neutral third party that works with wireless carriers to pre-install apps on new cell phones. Then sells the ‘slots’ to app-driven companies such as Uber, Amazon and Netflix.
  3. PAR Technology (PAR)
    • Miller’s Thesis: The asset Greenhaven wants to own is the restaurant POS (point of sale) system, Brink. Brink remains buried under a defense contracting business and a hardware business that is currently far bigger.
  4. BlueLinx (BXC)
    • Miller’s Thesis: The company has 9M shares, a sub-$300M market capitalization, currently running at approximately $100M in adjusted EBITDA per year. There is debt, but all the earnings improvements would accrue to the equity holders.
  5. SharpSpring (SHSP)
    • Miller’s Thesis: If the product continues to evolve and SHSP can maintain a LTV/CAC above 5, this [recent] sell-off will likely be a blip on the way to a bright future.


Miller’s Newest Holdings: SPAC and South Africa

Miller bought two holdings during the 3rd quarter:

  1. GigCapital Rights/Warrants (GIGRT/GIGWS)
  2. Undisclosed South African Stock

Let’s start with the position we actually know, GigCapital.

GigCapital went public via SPAC. If you’re not familiar with SPAC IPOs, this description (via Reddit post) should help:

“SPACs are, without question, flaming piles of garbage.”

Yet Miller finds himself hunting amongst the inflamed piles of dung.

What Miller Sees in GigCapital

In his own words, Miller’s done everything in his power to tilt the odds of success in favor of Greenhaven Road. He’s the only investor (to his knowledge) that’s traveled to visit the soon-to-be acquired company.

Further, Miller’s structured a deal with GigCapital that locks in favorable returns should shareholders approve of the acquisition.

This smells of “Heads I win, tails I don’t lose much”.

If you want to dive deeper, check out here and here.

Cliffhanger in South Africa

Miller continued purchasing a small, South African company during the quarter. In his words, the investment is a “bet that the underlying earnings power and forgiving valuation will overcome the macro headwinds that will undoubtedly rise.

While not disclosing the name of the company, Miller offered clues. Here’s what we know:

  1. The company has high insider ownership (40%)
  2. Best-in-industry operator in a cyclical industry
  3. Company is profitable and generating double-digit returns on equity
  4. Company trades at a substantial discount to book value
  5. P/E <3x

There’s a lot to like about South Africa. As Miller points out, investing in South Africa offers non-US equity exposure. Second, South African equities are dirt cheap. Many companies trade sub-5x normalized earnings.

If you can sift through the junk (like with any market), you’ll find gems.

Consider this your weekly Scavenger Hunt!


Movers and Shakers: Artko Capital Q3 Letter & Howard Marks Memo

Peter Rabover is having himself one hell of a 2019. Rabover runs the investment partnership, Artko Capital, LP. He focuses on micro-cap and special situation opportunities.

While known for his eccentric Twitter profile, Rabover is equally as impressive when it comes to stock-picking.

Through the first 9 months of 2019, Artko returned 36.9% net of fees. Crushing the stated benchmarks. Since inception, the Fund’s generated a 13.6% annualized return. Impressive all around.

Benefits of Being Small

Rabover starts his letter by explaining the competitive advantages of staying small. The smaller the partnership, the greater the available opportunities. Rabover mentions a study by Robert Ibbotson of Zebra Capital.

Ibbotson studied the performance of 3,500 stocks from 1971 – 2017. His results are below (from Artko’s letter):

Investor Letters

Smaller, more illiquid names generated the highest annualized returns: 16.05%

At this point you’re thinking, “Why doesn’t everyone invest in the smallest, most illiquid assets then?”

Great question. Peter offers a reason:

“Investment management companies like to make a lot of money by growing through scale and their investors do not like to lose money or having the appearance of losing money by having it tied up in illiquid, mark-to-market securities.”

In other words, loads of career risk in micro-caps.

Artko’s Latest Portfolio Updates

Portfolio Additions

  1. Flotek (FTK)
    • Size of position: 10% Core position at average cost basis of $2.04/share
    • Artko Thesis: This past quarter’s 35% drop below levels where company’s implied market cap was almost 100% cash offers hefty margin of safety. It’s also trading at 65% of Artko’s estimated liquidation value

Portfolio Sales

  1. Leaf Group (LEAF)
    • Size of sale: Entire 8% position at average cost basis of $7.20/share (good enough for a modest profit)
    • Reason for Selling: Saw negative news on all fronts of the business, especially rapid deterioration of e-commerce business.
  2. Skyline Champion (SKY)
    • Size of sale: Entire 9% position at close to $30.00/share (hefty profit from initial purchase at $12.50)
    • Reason for Selling: The upside was no longer meeting the return hurdle to remain a large position.
  3. USA Technologies (USAT)
    • Size of sale: Remaining 4% position at around $7/share (hefty profit from <$4/share purchase price)
    • Reason for Selling: Announcement that the company would not be able to meet its NASDAQ filing deadline, which lead to delistment from stock exchange.


Howard Speaks, We Listen

Warren Buffett reads Howard Marks’ memos. We should too. In his latest edition, Marks discusses negative interest rates.

Marks admits that he “doesn’t know anything” about negative interest rates. But that’s the point. According to Marks, nobody does (emphasis mine):

The fact that we know what they are — as we do with inflation and deflation — doesn’t alter the fact that we don’t know for sure why negative rates are prevalent today, how long they’ll continue in force, what might cause them to turn positive, what their consequences are, or whether they’ll reach the US.”

Negative Rates in a Nutshell

Marks’ first interaction with negative rates came in 2014. The dialog that follows between Marks and his lawyer (Carlos) paints the perfect picture on negative rates.

Carlos: The money has arrived. What should I do with it between now and Monday?

Marks: Put it in the bank.

Carlos: You know that means you’ll get less out on Monday than you put in today.

Marks: Okay, then don’t put it in the bank.

Carlos: You have to put it in the bank.

Marks: So put it in the bank.

If you receive less money at maturity than you put in at the start, why would anyone buy negative interest debt? Marks offers four reasons:

  1. Flight to safety as investors flock into a sure (but relatively smaller) limited loss
  2. A belief that interest rates will go more negative, thus raising the price of the bonds
  3. An expectation of deflation, causing purchase power of repaid principal to rise
  4. Speculation that currency underlying the bond will appreciate by more than negative interest rate

Would the US Go Negative?

Marks offers a couple ideas should negative interest rates find their way to the US.

First, you could store your valuables in a Swiss private bank. This will cost you, of course, but the fee would be smaller than the negative interest received at a bank.

If you don’t like that idea, Marks quips, you could try this:

Move out on the risk curve to strive for returns above those offered by safe instruments in this low-return (or negative-return) world … but do so with caution.”

What will be your strategy if we see negative interest rates?


Resource of The Week: ValueDach’s Interview with Guy Spier

valueDACH released their latest interview with Guy Spier. Spier runs Aquamarine Fund, an investment partnership inspired by Buffett’s old partnerships.

The interview is 30+ minutes of gold. Here’s a few quick hits on what Spier chats about:

    • Spier’s view on mistakes
    • Three lessons Spier learned from Mohnish Pabrai
    • Typical day-in-the-life of Guy SPier
    • Right incentives in life

If you haven’t already, make sure to subscribe to valueDACH’s channel. I’m not paid to endorse them, they just make great content.


Who Won The Internet? — Options Trader Wins Big

Have you ever dreamed of turning small sums of money into larger sums of money? Of course! That’s why you’re an investor.

What if I told you that you could skip ahead? What if, through two trades, you could turn $700 into $100K+? Sound too good to be true?

Well, consider this guy lucky:

Investor Letters

For those without calculators, that’s a 13,967% return.


That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com.

Article by Brandon Beylo, Macro Ops


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