QE to Infinity and September Performance Review
Hello Everyone,
Following the official launch of the fund in June, 2019 continues to be very kind to Storm Port Capital as the fund gained 14.03% in September bringing the Year-to-Date return up to 25.72%. This performance is reassuring in that I believe both our fundamental research process, and investment strategy, are positioned well for this market and the market conditions over the next several years. We believe in being fallible, and will always maintain a 50/50 long-short portfolio structure in order to protect capital first and foremost against the unforeseen volatility, both up and down, in the markets today.
I wanted to begin with a couple key topics that I'm looking at as the year nears its end, then discuss some specific instances that helped the fund perform so well over the past month, and I believe explain a little better our structure. Lastly we will end with some background on some of the themes and stocks we are positioning ourselves in moving forward.
The theme of the markets going forward through year end and through all of 2020 will be QE or Quantitative Easing. You might have possibly guessed I would focus on China and a trade deal, Hong Kong and returning to peace, or maybe the election in the USA. Nope. Nothing else comes close to QE. As the Federal Reserve warms up the money printing machines again, and begins buying bonds in October, we need to begin looking for two things: cracks in the system signaling a lack of trust in the market by it's participants, and topping of the S&P and Dow. Both of these will be relatively clear, as the Fed lowers rates further and further, and buys more and more bonds with newly printed money, stocks will begin to react less positively, eventually flat-lining and turning negative, while bonds will do the opposite. When this happens run for the door. It happened in Japan in the late 80's, Japanese stocks peaked in early 1990, and then dropped for 30 years, while rates stayed glued to zero! If you bought the Nikkei in 1990, you'd be down roughly 20% over the past 30 years on your investment. That could happen to the USA and it's markets. Below is a 67 year chart of the Nikkei.
Below is the initial expected purchase pace for the Federal Reserve with it's QE program. I believe these figures will be ultimately much larger as the market fails to respond and more stimulus is needed to get the same response (stocks going up). Following this chart like a hawk is the most important job of any asset manager today.
By now I expect that everyone has read or heard about the disaster that is the We-Work business and it's accompanying IPO. I don't need to revisit any details here, however I choose to see the blowup of the We-Work IPO as a canary in the coal mine of public markets today. Below are two charts sounding the alarm that at the least the tech market stocks need to come back down to earth, along with any other business that has never actually earned a profit, but somehow managed to go public at 10x Sales. The first is a chart of the % of newly listed companies that lost money and did not make a profit the past twelve months. We (the market) just surpassed our old record set during the dotcom bubble and IPO'd over 80% junk companies with no profits in the last twelve months. The second chart is a little scarier to me. It shows that in the same time period, tech stocks going up and their positive performance has not been a result of earnings or sales increasing, but actually the stocks getting bid up by buyers willing to pay higher multiples. This is not space we want to be buyers in.
Lastly is just a chart of EBITDA and it's growth rate. This is something to follow and never a good idea to buy stocks without deep research in an environment when global earnings are in a downtrend. Now we do want to start buying at the turning point in this chart, but that's always hard to pinpoint. Either way it's another warning flag telling us to look both ways.
FUND PERFORMANCE
The past several months have been exceptional for Storm Port for several reasons in my opinion. First we always invest assuming we are wrong. We build a position with the understanding that we either got the timing or the fundamental analysis wrong, or possibly both, and we need to plan for that. Secondly, despite our in-depth research and review of analysis and news, we do not fall in love with any positions, and maintain a certain level of diversification at all times. Third, we will always maintain equal weighting investing long and short, with the understanding that the market is fickle, and on anyday, can go up or down thousands of points. With these fundamentals in place, and a focus on stocks with amazing upcoming catalysts and strong numbers, or the opposite for a short, we believe a lot of the landmines in the market are removed before we choose to buy or sell short anything.
Success Stories this Month
BITA: Bitauto was a position we built over months as the stock declined. The fundamentals were consistently improving despite China's economic problems, and the founder was a man on a mission to multi-billion dollar sales no matter what. Well the company and other investors thought the same way and an acquisition was announced to take the company private at a low price (still profitable for us) in September. The price is actually being debated because a lot of people think the acquisition price is far too low and management is stealing the company.
DDS: Dillards is a story of listening to management. Although the stock did poorly in September several notable investors loved the stocks fundamentals, as well as the stock markets fundamentals around the actual shares. Billionaire hedge fund manager David Einhorn wrote up a theory in his Q2 newsletter suggesting that the stock could be short squeezed if the management and other investors positioned themselves bullishly. We began buying the stock at the end of the month after the management of Dillards and members of the founding family still involved in the business said that they would continue to buy shares and possibly take the business private.
CVNA: Carvana is a trash company selling cars at a loss from vending machines and apps. You didn't read that wrong. I've been shorting this stock over and over the last several months. It is a disaster and might go bankrupt depending on their financing.
KEM: Kemet sells electrical components that are used in several industries, but the story pushing the stock, besides great fundamentals, is 5G. They are a key supplier feeding the 5G growth phase in the USA and will continue to benefit both in the press and in their financials as the transition to 5G takes plae. We bought the stock several times throughout September, building up our largest long at this time.
PLNT: Planet Fitness, we shorted this stock many times over past several months. The stock was a Wall Street darling and you had to be very careful fighting the trend. Eventually several vocal critics echoed our sentiments that sales would hit a wall, the fundamentals were not there to support the stock, that the industry has no barrier to entry, and that the franchise model was not a good fit for the stock. Jim Chanos, a famous short-selling hedge funder, went public with his short position and confusion at the stock price, and threw flames on the fire of the already dropping stock.
Thank you for taking the time to read this all. I love to talk the markets and could go on and on. I look forward to hearing your feedback, answering any questions about Storm Port or our method, or discuss investing in the fund anytime you like.
Thank You,
Thomas Dean Grimes III
