1Q 2018 Performance Letter

Since the Markets are closed on Good Friday, I will take this time to send out my Q1
2018 Letter. I will go over the returns for both the Voyager Fund and the SteadFast Fund for the most recent quarter. I also want to start a tradition of putting a quote that I find meaningful to investing as well as life beyond investing, and I hope to keep this going with each quarterly letter. 1Q 2018’s quote comes from the tenacious Army General, George S. Patton:

“If everyone is thinking alike, then somebody isn’t thinking.”

Voyager Fund Performance

For 1Q 2018, the Voyager Fund returned 6.70%​ total, and 5.02%​ net of fees (remember,
there aren’t actual fees, merely this is to make things as realistic for you as a partner, and for me as an investor). During the same time period, the S&P 500 returned -2.10%, ​the DOW Jones Industrial Average returned -2.81%​, and the NASDAQ returned -0.75%.
As I have mentioned in previous letters, the Fund’s performance will more likely than not deviate from that of general market consensus. During this quarter, that deviation swung in our favor, however I implore you to understand that since the Fund is different than the benchmarks, the NAV of the Fund will sometimes deviate in an unfavorable direction. This is investing, and this is to be expected if we want to reap the benefits of long – term asset appreciation through strategic capital allocation. If it sounds like I cloak the positivity of the Fund’s performance in a blanket of realism, it is because that’s exactly what I’m doing. Over the course of five years I fully expect to outperform the market, however, these quarterly results should not be a full extrapolation of the success of the Fund. Nevertheless, it is a positive sign.
The Winners
Over the course of the quarter, the Fund stayed between 10 – 15 positions, which is
expected. Without a doubt, one of the leading drivers of the Fund’s growth for the quarter was our position in Michael Kors (KORS). KORS was a 5% gainer for the Fund on a 50bps capital risk. It was, in essence, a gold standard investment. Besides KORS, we didn’t really cut any winning positions before their stop-losses, which is exactly to plan. Cut the losers short and let the winners run. Another one of our holdings we sold for a profit was Sierra Oncology (SRRA) for 79bps of profit. This position was a net-net women’s oncology company in which I extracted virtually all of the net value of the asset before the stop-loss was hit.

There were a couple momentum trades we made for a profit, VXX and XLY. XLY was
more of a technical trade than an investment in a good business, because XLY is an ETF of the Consumer Discretionary Sector. Price was trading between a rectangular range of $88 to $93, and I entered the position around $93.50 and sold at $104.36, a 12% run-up in price before hitting my stop-loss.

The second momentum trade I made was on VXX, a Volatility ETF. The reason behind this trade was simple: in Early February the market experienced extreme bouts of volatility. In order to protect some of the downside risk exposure of the portfolio, I took a long position in VXX for 100bps, making it the highest risk point trade on my book. I knew this trade would be a shorter term trade, so I closely monitored my stop-losses, moving them up as fast as I could to get to at least break-even. I entered the trade on 2/5 and exited the trade on 2/6 for a 60bps profit. This isn’t a trade I will always do, but it’s something worth playing around with as long as I keep stop-losses in check. This trade was in inspiration to Alex Barrow from Macro Ops. I like to copy from the good guys in this game, and he’s one of them.
The Losers
I will without-a-doubt be wrong more often than I will be right over the course of my
investment lifetime. This should not come as a surprise to anyone who follows my blog or has read past investment letters, as I stress investing is a hard endeavor, and I am not trying to have a high win percentage. My goal is to keep my losers small, and make my winners as large as possible. This creates a positive asymmetry for each trade, thus creating positive asymmetry for the entirety of the Fund. So let’s get to these losers.
The quarter started off with a loss in the Junk Bond position through ETF JNK. In this
case, I was most premature in my entry on the short side and didn’t let price get down to a level in which the probability of a further move downward was higher. After covering my short for around a 15bps loss, price retracted and headed lower to where it sits currently at 35.85. Looking back, what can I learn from this trade? I should set my stop losses farther back to respect the price range in which I was trading, that way I don’t get caught for a loss by random daily fluctuations. Other losses sustained during the quarter included Long Wheat, Long ESV, Long RUBI, Long RSX, and Long RUBUSD.

However, the biggest loss sustained for the Fund during the quarter was Yatra! Online
(YTRA). YTRA is an online travel agency company based in India. The company provides air ticketing, hotels and packages, along with other travel services. India’s economy is soaring right now, and this was a long play on the future of that growth. With a booming economy, it means more people willing to travel in and around India as citizens experience higher wages, more income, and extra discretionary spending. For the past three years, earnings, revenues, and profits skyrocketed. I entered the position on 2/7 for 50bps. A day later price fell 6% so I added another 25bps to lower my cost-basis. This established a 75bps open risk position. On 2/9 I moved my stop losses up to create open risk of 50bps. After moving stops up, I added another 50bps of open risk to create 100bps position. After price traded lower still, I moved stop losses up to 80bps of open risk. On the 28th, price hit my stop loss of 6.84, for a loss of 80bps.

I originally heard of this company via Alex at Macro Ops. I do a lot of analytical research for Alex and the guys at MO, and our investment relationship has been well documented in past letters. Like Alex, I still hold high conviction for this trade and will look to get back in upon further consolidation/basing. Once again, it’s always nice to piggyback on some of the good guys in this business.

My Highest Conviction Investments
Advanced Emissions Solutions, Inc. (ADES) is my highest conviction investment in the
Fund. I wrote a detailed piece on the company, which you can find here, which sums up the investment thesis well. In short, ADES is a cash flow generating machine that benefits from tremendous tax credits through its refined coal facilities that it has through a joint venture with Tinnuum Group. Along with the tax credits, the most recent Tax Act enabled ADES to forecast between $275 – $300MM in FCF generation over the next two years. The company has no debt, issues voluptuous dividends, and actively buys back shares on a strategic basis. The company is enacting on a tremendous capital allocation model of using FCF to funnel it back into the business and to reward its shareholders.
Share price has risen upwards of 35% since my initial entry, and I have been
strategically adding to the position while moving stop-losses up. Currently there is an open risk of 42bps, and I am looking at the $12 price level for my next entry. If price breaks through $12, I will most likely add my last leg of the trade. I am highly optimistic of the future of the business and its ability to sustain its cash flows for the next two years. The only issue I have with this company is that the tax credits will end in 2020, and I am not sold on how the business will be able to sustain its high free cash flow thereafter. This could change, however, because ADES is developing an emissions chemical that they believe to be the best in the market, with no direct competition.

My next high conviction investment is Consolidated Water Company (CWCO). If you
haven’t read my piece on CWCO, you can check it out here. In short, CWCO is a water
desalination company that specializes in providing clean, potable water to communities and governments that wouldn’t otherwise have access to clean water. The company has a low cost operating model, virtually no debt, trading only 6x its net cash, and 3.75x its NCAV. The company has a net profit growth rate of 27%, a n EBITDA margin of 21.6%, and an average 10yr revenue growth rate of 3%. Using a DCF model, we get an approximate fair intrinsic value between $16 – $20, which would represent a 30 – 50% discount. Since entering the position, shares gained nearly 10%. There appears to be upwards resistance at the 14.85 – 15 level. If price breaks through that, I will add to my position.
My Short on Shorting
I have no restrictions with how I operate the Voyager Fund. This means I can engage in
shorting shares of companies I deem overvalued. There is still a ton of debate on whether shorting has a place in proper investment practices, or whether it is merely an anti-capitalist / anti-American way of expressing ones pessimism. The two sides are pitted against each other in what seems to be an endless struggle. One of my investment heroes, Michael Burry, isn’t opposed to shorting, and in fact used it at Scion Capital beyond his famous short on the housing market. Other investing greats such as David Einhorn and Bill Ackman put forth shorts on a regular basis, while Seth Klarman uses put options (another form of shorting) to hedge his downside risk.

My rationale for shorting is this: It is my job as an investor to find value where value resides. On the flip side, in my quest to find value, I will sometimes find companies which represent the antithesis of what I deem as an undervalued investment. For example, I initiated a short position in Tesla over this last week, and I have been clear in my intentions on wanting to short Tesla for a while. Although I love the product and love the CEO, the company burns through cash like its their job. In the words of Pat Dorsey, the company takes cash, puts it in a trash can, and then sets the trash can on fire. Along with burning through cash, the company is tremendously leveraged while most of its sales are backboned through subsidies from the US government. I have no problems shorting companies like these. I will continue to short companies that fit this profile. However, I do want to be clear that I am not actively looking for shorts, per say, I am merely finding value where I can, and then recognizing the antithesis of that value.

SteadFast Fund Performance

The SteadFast fund lost 1.02% of its NAV over the course of the quarter. This goes along with the plan of the SteadFast Fund, which is to be a safe haven of investment with providing as little downside risk exposure as possible. This can be seen with its only 1% drawdown, while the S&P fell roughly 1% more. I am tinkering with the idea of adding a moving average crossover strategy coupled with the SteadFast portfolio. This might provide extra alpha while reducing the downside. More updates will follow if I choose to pursue this idea.

Conclusion

This was a good quarter for the fund, no doubt. I sleep well at night because we own good businesses at great prices, and we have risk management systems in place to prevent permanent losses of capital. It remains my job (and always will) to turn over as many rocks as I can in search of value. Investing is my passion, it is not work. As an investor I get the privilege of strategically allocating capital into investments that I see as having the greatest potential return. Investing is an endeavor as old as time, which is good, because I’m an old soul. It is my promise to keep learning, keep studying, and keep turning over the rocks. I sacrifice a social life and late night parties to study, analyze charts, and find undervalued businesses. The funny thing is, I wouldn’t trade it. As always, don’t hesitate to reach out via phone, text, or email. I go to bed early, so if you can catch me before 9pm and after 5:00am, I will most likely be able to chat. Be on the lookout for further blog posts about potential investments. A quick primer: I am digging into Vaalco Energy (EGY) as a potential long play on oil prices, as well as L Brands (LB), and Sturm Ruger (RGR).

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