The equity investing environment continues to be characterized by low interest rates, low economic growth and full valuations, the Kenmare Fund noted to its investors in a July 29 letter reviewed by ValueWalk. It is in this environment the fund had a slightly negative quarter, down -1.6%, bringing the year to date loss to -1.3% at a time the S&P 500 was up 2.5% and 3.8% respectively. The fund lost on both its long and short exposure in the second quarter.
Investor uncertainty and “safe havens” were good for those who purchased them six months (or six years) ago, the letter said. However, valuation of such assets is stretched and they could be vulnerable to a change in interest rates. This shouldn’t concern Kenmare Capital investors, as a plan is in place should the market sell-off.
Value can be found even in a valuation challenged market environment, says Kenmare Capital’s McGrath
Even in this valuation challenged market environment, Kenmare’s founder, Mark McGrath, thinks value can be found, it’s just a matter of looking at the world from a different perspective.
Consider Alphabet, for example. Over the past five years the stock has been on a tear, moving from nearly $250 per share to where it is currently trading above $800. Parent of Google, the search growth engine is categorized by McGrath as a “reasonably prices secular growth story.”
In the investor letter, McGrath didn’t detail his logic. The concept of “secular growth,” operating profitably on a consistent basis regardless of the strength of the economy, is clearly a prized possession.
Google, for its part, has been nothing but an exceptional growth stock from the point it went public August 20, 2004. The stock price did find gravity leading up to the 2008 financial crisis, but perhaps what was most interesting is that it bottomed November 21, 2008. It is worth noting that from a correlation standpoint, Google bottomed and then led the stock market higher. The S&P 500 index, for its part, began its upward recovery February 2009, nearly three months after Google.
Kenmare Capital’s McGrath is prepared for a sell-off and ready to deploy assets when it happens
Beyond the search for value amid secular standouts such as Google, McGrath thinks he sees value in Dish, a stock he says is “overlooked / misunderstood.” He also likes Willis Towers Watson, a risk management and insurance brokerage firm whose name sits on what was at one point “Sears” Tower in Chicago.
“If we can find more positions like this, and if our shorts perform better, it should be possible for Kenmare to earn a reasonable return without lowering the bar on risk standards should the current market environment persist,” McGrath wrote, pointing to numerous concerns. But don’t fear a sell-off, McGrath says. That means opportunity. “Alternatively if we were to get a sell-off, the Fund with its defensive posture should be in a position to protect capital, and put it to work quickly at lower valuations.”