Whitney Tilson’s Kase Capital is out with its Q2 letter to shareholders (see Kase Capital Q1 letter to shareholders here). The fund continues to have what Whitney Tilson describes as ‘a solid year’, rising 1.9% in Q2 vs. 2.9% for the S&P and the Dow. Year to date, the fund is up 8.7% vs. 13.8% for the S&P 500 (.INX) and 15.2% for the Dow. Whitney Tilson explains (via email). ValueWalk readers can hear Whitney Tilson speak at the upcoming Value Investing Congress (NYC: Sept 16-17) and receive a huge discount, see below for further details.
Kase Capital Executive Summary
I use the word “solid,” despite the fact that our fund is trailing the major indices, because it has achieved both of its objectives so far this year: first and foremost, to preserve capital and, secondly, to earn a satisfactory rate of return. In general, our fund will not keep up with a rapidly rising market because I usually hold some cash and always have a decent-sized short book. This tends to pay off in down markets, however. For example, in June the market had 10 down days, with an average decline of 1%. Our fund outperformed on nine of those days, with an average decline only half the market’s.
The fund’s returns this year have been driven by strong gains across nearly the entire long portfolio, with a special mention for Netflix, which has more than doubled. Here is the YTD performance of all 11 long stock positions in the fund as of the beginning of the year (disclosed in the 2012 annual letter, plus four new stocks I’ve purchased this year (ranked in descending order of current size):
In the rest of the letter, I discuss six longs (AIG, Berkshire, Netflix, Spark Networks, Hertz and dELiA*s) and two shorts (InterOil and World Acceptance) in depth.
Below is a brief summary on each followed by the full Kase Capital letter embedded in scribd.
Kase Capital on American International Group Inc (NYSE:AIG)
We think American International Group Inc (NYSE:AIG) is worth at least its tangible book value of $59.99/share, yet the stock closed Friday at $27.21, a 55% discount, due primarily, we believe, to the lingering taint from the crisis plus the overhang of the U.S. Treasury’s 61% ownership of the stock. The government’s cost is roughly $29/share, so investors see little upside to the stock as long as there is a motivated seller at this price.
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s stock has been on a tear over the past year, rising from just above $120,000 per A share to the current level of $168,60. So why haven’t I exited the position and realized the healthy gains? Because the company is firing on all cylinders and hence intrinsic value has risen nearly as quickly. 18-19. To be sure, Berkshire’s stock isn’t quite as cheap today as it was a year ago, but it’s still approximately 15% undervalued.
Kase Capital on Netflix, Inc. (NASDAQ:NFLX)
In contrast to Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), I’ve trimmed our fund’s holdings of Netflix more aggressively over the past year for two reasons: a) the stock has risen much more dramatically; and b) I have much less confidence in my ability (or anyone’s ability) to value it.
We purchased a small position in Spark Networks in March 2010 at a bit above $3 and the stock did absolutely nothing for two years before skyrocketing over the past year.
Kase Capital on Spark Networks Inc (NYSEMKT:LOV)
The company owns a number of online dating sites, most notably its original business, JDate, for Jewish singles, and a new venture, ChristianMingle, for Christian singles. JDate is a wonderful cash cow – it’s not growing, but has had 90%+ contribution margins for each of the past 11 years. Spark Networks Inc (NYSEMKT:LOV) is taking the profits from JDate and investing heavily in ChristianMingle in an effort to create another niche-dominating cash cow like JDate. Spark’s stock has risen sharply because it’s now clear that this effort is paying off: average paying subscribers for ChristianMingle jumped 51% in Q1 and over past 18 months ChristianMingle has developed nearly 80% awareness among its target market.
Kase Capital on Hertz Global Holdings, Inc. (NYSE:HTZ) and Avis Budget Group Inc. (NASDAQ:CAR)
Since 1999 the auto rental business has gone from six major competitors to three (Hertz, Avis, and Enterprise), which now control 90% of the U.S. industry and more than 98% of the airport segment – and the few remaining players start behaving rationally and raising prices, there can be a decade-long tailwind of strong top-line growth combined with improved pricing, margins, and returns on capital, leading to rapidly rising earnings. This, combined with investors awarding these earnings a higher multiple, can lead to tremendous long-term stock returns – a great example is the railroad industry over the past decade.
Kase Capital on dELiA*s, Inc. (NASDAQ:DLIA)
We’ve owned nearly 10% of teen apparel retailer dELiA*s, Inc. (NASDAQ:DLIA) for five years and it’s been a dreadful value trap. I’m more optimistic about dELiA*s than I’ve been in a long time thanks mainly to a fantastic new CEO, Tracy Gardner, joining the company recently.
Kase Capital Shorts
Kase Capital on World Acceptance Corp. (NASDAQ:WRLD)
Kase Capital on World Acceptance Corp. (NASDAQ:WRLD) is an installment lender that makes small, unsecured loans to subprime borrowers via 1,203 offices in 13 states and Mexico. It has highly attractive financial characteristics and has grown strongly for many years, leading to exceptional stock performance. Keep in mind, however, that these statements also characterized subprime mortgage lenders like Countrywide up to the peak of the housing bubble – just before they collapsed.
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