Livermore Partners letter for the third quarter ended September 30, 2016. Impressive returns was up 68% in H1 and another 18% in Q3. See the full letter below, but first.
We are now three-quarters into 2016 without a defined path on US interest rates. The current economic landscape and effects of the Fed, the upcoming election, as well as Q3 earnings will be drivers. Meager global growth continues to paint the Fed into a corner, and is reflective in most of the developed world.
Therefore, Central banks globally remain in a challenged situation whereas monetary stimulus is at a cross-road. The Feds easy money policies that have lead stock indexes to record highs are endanger of reversing, and the markets are slowly adjusting. More is needed to reach escape velocity and increase core inflation, but this must come from an alternative and sustainable outlet. Namely fiscal policy and tax reform. Which can have a true and lasting effect on GDP. Until then, Livermore Partners remain very cautious and guarded. Especially given the upcoming uncertainty of the US election.
For the Q3, Livermore Partners again had a solid quarter. At September 30st, Livermore Strategic Opportunities LP ended the Q with a gain of 18%.
Much of the strength came from core holdings in both long and short positions. Notably, our activist position in Mitra Energy(MTE), the continued jump in commodity trader Glencore PLC(GLEN.L), and even little Canadian energy company Zargon Oil and Gas(ZAR), where we now sold all our bonds and added 50% more gains from the previous June Quarter.
Other factors adding to gains were a large and successful short bet on Corrections Corporation of America(CXW) as well as biotech Intrexon(XON). Both names came under pressure on fundamental and structural business model issues.
Our Urban Outfitters(URBN) short remains against us, as does Chinese tech companies Alibaba(BABA) and Weibo(WB)(though we feel they will soon gravitate down to earth). Plain and simple, high valuation securities focusing on ever-increasing multiples is a car wreck waiting to happen.
What’s been odd is that investors (and the markets) consistently ignore the warning signs. Instead, focusing on the “greater fool theory” of investing. This tends to occur in market tops.
We feel there are many solid one off long situations in what is otherwise an overvalued equities market. And in specific situations, we will continue to press for change and engage with management teams. So we have a dual agenda.
Additionally, we are focusing efforts on arbitrage and global investing strategies. Where the June Brexit vote and continued pound weakness is ringing the bell for Livermore. That London is calling!
YTD, Sterling has dropped to 10-year lows and down nearly 20percent. Thus, providing Livermore Partners with opportunity, and ability to acquire and build stocks in value-driven UK companies, which trade at significant discounts to their US peers.
Livermore Partners has since been focusing more on European investments (i.e. our ETO.L and Glencore PLC) since this occurrence first presented itself back in January. To shift assets from US to UK. This not only allows for deeper-value, but also drives us further downstream. To engage in activist and event-driven situations, which is our specialization and niche.
Depressed sterling isn’t the only benefit. In fact, Brexit is not a “good” thing. It will cause for uncertainty and weak growth. So acquiring companies who’s top line is failing is not a welcome event. It’s what becomes of that weakness that creates the positive. Companies will be exposed. Which will lead to alternative ways to unlock value for shareholders. Thru acquisition, spin-offs, capital returns and corporate cost rationalization.
This is where we see a path and true benefit to capture returns for Livermore Partners clientele.
In the Quarter, we stayed the course but did witness a hostile bid for our Entertainment One (ETO.L). The media company behind the lovable Peppa Pig franchise. Livermore, back in January acquired a stake in the company as the shares hit yearly lows of near 150pence. ETO failed to fully engage with the acquirer, ITV (ITV.L) for a buyout of the shares at 239pence. Ultimately, ITV pulled their bid given the lack of engagement.
Livermore Partners feels vindicated in our thesis that ETO was mispriced and very undervalued
(See article Link) and thru our public statement, (that if the company didn’t address their credit ability issue) a suitor may soon show their face.
We feel ITV was opportunistic and the deal undervalues ETO. Therefore, management must do a better job addressing the valuation gap. We must witness further adjustments to the strategy to reflect its true intrinsic value. Additionally, Livermore Partners feels the Board of EOne requires change. So here, we will continue to be steadfast and seek further value for the shares.
In closing and as we look out into Q4, we envision interest rates ticking up and the market anticipating increased volatility. With that, we will again look to capitalize. Given it’s the lack of volatility which has been problematic. As it returns, we see dislocations reverting and greater opportunity to make money. In a market with many unknowns, it is the one thing I am sure of.
Thank you all for the trust and support.
Very truly yours,