The first quarter of 2018 is in the books, and hedge fund managers are now starting to release their quarterly letters to investors. The quarter was a difficult one for hedge funds across the board, and Lakewood Capital is no exception. The fund was down 3.4% for the quarter that ended on March 31.
By comparison, Eurekahedge said earlier this month that all hedge funds were down 0.13% in the first quarter, which marked the worst quarterly decline since the first quarter of 2016. Eurekahedge also reported that North American hedge funds were hit the hardest during Q1, racking up $1.2 billion in performance-based losses.
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Lakewood Capital Q1 2018 letter: by the numbers
Lakewood Capital managing partner Anthony Bozza said in his Q1 2018 letter that the fund’s long positions posted a return of -3% on capital, while hedged long equity positions lost 7%. Short equity positions returned -1% on capital, while fixed income positions lost 2% on capital. Lakewood Capital was 89.2% long and 27.3% short during the first quarter, amounting to a 61.9% net equity exposure.
Bozza notes that volatility spiked briefly during the first quarter, carrying the CBOE Volatility Index to the highest level seen since 2011. Ultimately, the volatility ended up being contained, but there remains a great deal of uncertainty and concern among investors right now, he added. Still, he feels the current market environment is “reasonably favorable” this time around because there aren’t any major concerns floating just underneath the surface, such as Brexit or a collapse of the financial system.
Lakewood Capital’s big winner: Airbus
The Lakewood Capital partner noted that many of their longs benefited greatly from the Trump tax cut, with most corporations seeing their federal tax bills cut almost in half. The first quarter brought a widespread pullback across most of the tock market, although the Street continued to favor a precious few names, which Bozza feels are overvalued. Specifically, he named Tesla, Celltrion, Aurora Cannabis, PRA Group and Canopy Growth as being overvalued amid the Street’s ongoing penchant to “selectively exercise eternal optimism.”
According to Bozza, Lakewood Capital’s biggest winner during the first quarter was its long stake in Airbus. The firm revealed its stance on the aircraft manufacturer in its third-quarter letter for 2017. Bozza predicted that Airbus’ earnings would ramp significantly on the back of its new aircraft programs and better currency exchange rates. The company ended 2017 strong, and he believes that investors became even more confident in the company’s execution because of that strong performance.
Biggest loser in Lakewood Capital’s Q1 2018 letter was Adient
Lakewood Capital’s biggest losing position during the first quarter was Adient, which Bozza originally wrote about in his letter for the fourth quarter of 2016. The auto parts manufacturer’s stock remained strong in 2017, but it shifted lower during the first quarter of this year due to increasing losses in the company’s metals business, which were driven by new launches and increasing costs for raw materials. Eventually, those higher materials costs will be passed on to customers in the form of higher prices from Adient, but higher prices had not been instituted yet during the first quarter.
Bozza believes Adient’s losses probably hit their peak in Q1 and predicts a recovery through the rest of this year. He noted that the company’s stock trades at only about six times earnings, excluding the metals business loses and some of the costs related to starting up the new joint venture with Boeing on aircraft seats.
Second-biggest loser was Comcast
The Lakewood Capital partner also highlighted Comcast as the firm’s second-biggest losing position during Q1. He noted that the TV and Internet service provider’s stock had been strong before the first quarter of this year, as its financial performance remained steady. However, Comcast stock took a hit during the first quarter after the company entered a non-binding bid to acquire U.K. TV network Sky.
Bozza would prefer that Comcast just “stick to the plan of repurchasing its undervalued shares” rather than making acquisitions, but he also thinks that if the Sky deal ends up going through, it wouldn’t make a material difference to Lakewood Capital’s thesis. He explained that if the two companies merge, then Sky would be less than 20% of the combined company and also be accretive to earnings.
In the long run, he continues to like Comcast, as he predicts “solid” earnings growth in the coming years and expects the stock to bring in “attractive returns in the coming years.”
New positions discussed in Lakewood Capital’s Q1 2018 letter
Bozza also mentioned some new positions in his Q1 2018 letter. Lakewood Capital bought shares of Deutsche Bank’s asset management business DWS Group in its initial public offering and then added on to the position shortly after. Lakewood Capital also initiated a new long position in Hyundai and revisited its long stake in WestRock.
New shorts during Q1 2018 include Ligand Pharmaceuticals and iRhythm Technologies.
