Scott Miller’s Greenhaven Road Capital fourth quarter letter to limited partners on the fund’s top five positions and portfolio changes.
Greenhaven Road Capital: Top 5 Names
You will recognize several names in the top five holdings. Over the course of the quarter, we added modestly to Fortress when it dipped below six dollars and ChipMos when it pulled back despite recording double-digit revenue increases, a share buyback, and margin expansion. The only new entrant to the top five holdings that we have not discussed in previous letters is Fiat Chrysler. We have been involved in Fiat for a couple of years in different ways. We started by purchasing a small position in Exor, a holding company of the Agnelli family which traded at a 30% discount to the value of Exor’s public market holdings which included shares of Fiat and the Italian soccer team Juventus. When we first became involved in Fiat, the company did not have full ownership of Chrysler, but there was every indication that Chrysler (Jeep, Dodge) was a very healthy business – and there was a path towards full ownership. We have added to our holdings as the path has become clearer and Mr. Market has provided opportunities. For example, we added when the deal to acquire all of Chrysler was announced, and we added when the shares pulled back as part of a process to list in the United States created an arbitrage opportunity. Fiat Chrysler has had 55 months of increasing year-over-year sales, a strong product lineup, an upcoming spinoff of Ferrari, very ambitious growth plans for Jeep, Alpha Romeo, and Masseratti – and, most importantly, a world-class CEO, Sergio Marchionne. Not only did Marchionne recognize the opportunity in Chrysler and put together what proved to be a very favorable deal and has operated in a very share holder friendly manner at each step along the way.
Fortunately, Fiat has appreciated significantly; we have a cost basis of €6.70 and it has grown into a top five position. There are several remaining catalysts in the years ahead, including a spinoff of Ferrari, and a debt restructuring to access Chrysler’s ring fenced cash that is possible with the completion of the merger between Chrysler and Fiat. At the end of the day, Fiat is a turnaround story with an impressive CEO who thinks about allocating capital and shareholder returns in a very refreshing way for the car industry. The strengthening consumer, lower gas prices, and product launches should all benefit the company, which is stuck in the auto industry – the biggest strike against the company. For the non-car enthusiasts among us, I recommend that you spend some time on the internet looking at the Masseratti lineup, including the expected launch of an SUV and a beautiful new sports car called the Alfieri. While Maseratti is not the most important piece of the growth story, they are very high-margin cars and a piece of the turnaround puzzle.
Greenhaven Road Capital: Recent Exits
The fund exited a small position in Harmonic (HLIT) at a loss and took some gains in Straight Path (STRP) that had more than tripled in value. Straight Path remains a significant position, but is no longer in the top five.
Greenhaven Road Capital: Short Side
The short side remained an area with limited activity focused primarily on indices. We covered our short of a technology company facing virtual obsolescence and took the tax loss, and we covered our short of a web-based business with a structurally flawed business model that loses more money with each additional customer locking in a small gain. We remain short a very highly valued slow-growth organic supermarket chain (not Whole Foods), and an English Soccer club with a demanding valuation. We imitated a short in a holding company selling at a premium to its holdings (a rarity) that is exposed to oil and gas. This short has not reacted as violently to the downside as most names in the sector, so, while modestly profitable, there may be more upside ahead. The individual company short positions remain very small, with no single short position being larger than 2% of the overall portfolio.
Greenhaven Road Capital: Aligned Incentives
As you know, unlike most funds, we charge no management fee. However, our offering document, does allow for the fund to recoup operating costs such as our fund administrator, tax preparation, and research related costs. For 2015, just like 2014 – we will be waiving all of those costs and I will assume them. As a limited partner, you will continue to pay the inecentive fee – but only on returns above 6%. The only other expenses will be trading related (commissions) and any interest charges that the fund incurs. Excluding the incentive fee, I expect the expense ratio for the fund to be below 10 basis points (1/10 of 1%) for 2015. Like last year, I will only make money if you make money. Our interests are 100% aligned.
Greenhaven Road Capital: Outlook
I have been surprised by the precipitous decline in oil prices, but more by the weakness in equity markets being attributed to the weakness in oil. Fortunately, we are not forced to speculate on the price of oil, and have not, but I do believe it will ultimately be a benefit to the U.S. economy and much of our portfolio. Yes, there will likely be some job cuts in the oil services sector and some secondary effects of reduced drilling activity, but we are a net importer of oil and the decline in gas prices and eventually airline tickets and a whole host of petro-intensive industries will be a net savings to the American consumer. I see continued strength for the U.S. economy in 2015 – but more importantly, I see little correlation between the performance of the companies we own and the overall economy. Our stories should play out if the economy is growing at 1%, 2%, or 4%. The tiny differences in macro outlook that pundits obsess about should not matter. Our thesises will be right or wrong but not because of a macroeconomic headwind or tailwind. Each stock we own has its own story, none of which are reliant on rapid economic expansion or the Fed raising rates, cutting rates, or leaving rates the same. Here is to a few of the stories playing out in 2015. As I ended my last letter… We will have down quarters and years, but I remain optimistic. The fund remains by far my largest personal holding, so I am eating my own cooking every single day.
Thank you for the opportunity to manage your assets alongside mine and my family’s.
See full PDF below.