Lakewood Capital Management LP earned a net profit of 6.6% for 4Q2013 and 13.0% for 2013, falling short of the fund’s goal of 15% annualized net returns across investment cycles. At the end of the year, the fund’s long exposure was 82.5% and its short exposure was 35.1%. Daily volatility was 4.6% for the year, less than half the S&P 500’s daily volatility of 11.0%, and daily beta was just 0.27, but strong gains from long positions were seriously undercut by losses from the fund’s short positions.

Lakewood Capital

Stocks doubled and tripled without substantive developments: Lakewood

“I would not be surprised if 2013 ends up being the most difficult year we ever see for our short selling strategy as we had to navigate through an environment where across nearly every industry it was a common occurrence for the stock prices of speculative, questionable companies to double or triple (or more, in several cases), often in the absence of any substantive positive developments,” wrote Lakewood founder Anthony Bozza in a recent letter to investors.

Lakewood’s top winners and losers

Spirit AeroSystems Holdings, Inc. (NYSE:SPR) was Lakewood Capital’s biggest winner for both 4Q2013 and 2013 as a whole, contributing 140 basis points and 273 bp respectively. “The company’s core operations have outperformed our original expectations and we continue to see significant upside in the stock,” writes Bozza.

Other major contributors for 4Q were long positions in NuStar Energy L.P. (NYSE:NS) (109 bp), Ryman Hospitality Properties Inc (NYSE:GET) (83 bp), Oracle Corporation (NYSE:ORCL) (77 bp), FedEx Corporation (NYSE:FDX) (62 bp) and a hedged long position in preferred Hyundai Motor stock (52 bp).

Other than Spirit AeroSystems, other 2013 winners were long positions in Ingram Micro Inc. (NYSE:IM) (173 bp), American International Group Inc (NYSE:AIG) (165 bp), Smurfit Kappa Group Public Ltd (LON:SKG) (OTCMKTS:SMFKY) (148 bp), CIGNA Corporation (NYSE:CI) (129 bp), Western Digital Corp (NASDAQ:WDC) (117 bp), FedEx (114 bp), Aetna Inc (NYSE:AET) (106 bp), and a hedged long position in Hyundai Motor Co (KRX:005380) preferred stock (129 bp).

Lakewood’s biggest loser for both 4Q2013 and second largest loser for 2013 was a short position on SolarCity Corp (NASDAQ:SCTY) (68 bp and 150 bp respectively). Bozza argues in the letter that SolarCity is really just a low return financing company with a solar energy angle, and that analysts have bizarrely not taken future taxes into account when estimating eventual profits (taxes aren’t a big concern right now because the company is losing money), but Lakewood isn’t the only company to make reasonable shorts and lose big in last year’s bull market. Lakewood’s biggest 2013 loss came from its short position on Tesla Motors Inc (NASDAQ:TSLA), the fund’s worst short position to date.