Firefly Value Partners, like all value funds, had a great 2016. As value outperformed growth for the first time in several years last year, the rising tide lifted all undervalued stocks and most value orientated funds have reported double-digit gains as a result.

For the full year 2016 Ryan Heslop and Ariel Warszawski‘s Firefly, a value-orientated hedge fund with David Einhorn backing and $479 million of assets under management, gained 19.8% rising 10.9% in the fourth quarter that’s according to the fund’s fourth quarter and full-year 2016 letter a copy of which has been reviewed by ValueWalk.

 

Firefly Value Einhorn Cub Firefly Value Up 19.8% In 2016
Einhorn Cub Firefly Value Up 19.8% In 2016. Source: Firefly Value

Longs added 17.8% to performance while shorts cost the fund 5.7% during Q4. For the full year, longs added 32.3% while shorts cost 10.6%. At the end of the year, the fund was 110% invested on the long side and 61% invest on the short side with 57 short positions and 26 long positions.

Einhorn Cub Firefly Value Up 19.8% In 2016

Banks and energy were Firefly’s largest performers during 2016. Rice Energy was the largest winner with a contribution of 11.1% followed closely by Comerica at 8.1% then Manitowoc (3.6%) and Bank of America (3.2%).

On Rice and Comerica Firefly believes:

“Rice remains one of the lowest-cost natural gas providers in the US. Throughout 2016, US natural gas production declined as higher-cost producers curtailed activity in response to low gas prices. At the same time, demand continued to rise. As a result, we enter 2017 with projected production lower than expected demand. With normal weather, that imbalance should widen. Prices will have to increase to incent marginal producers to drill for gas to meet growing demand. During 2016, Rice was able to continue activity uninterrupted and acquire more low-cost acreage in the core of the Marcellus. The company remains well-positioned to benefit from higher prices.

Comerica was our second-largest gainer. After years of Federal Reserve policies that have obscured the value of low-cost deposit franchises, investors have started to notice that a bank with $30B of noninterest-bearing deposits and a total deposit cost of 7 bps per year might be a franchise after all.”

On the short side, FireFly profited from a number of bets against failing companies. Shorts against two Italian banks produce a contribution of 2.4%. ValueWalk believes one of the banks shorted and now covered was Banca Monte del Paschi di Siena (“we covered Italian Bank A at the end of the year when their capital raise failed.”) The second largest contribution on the short side isn’t named in the letter but once again ValueWalk believes the target of Firefly is Ascena Retail Group, which we’ve covered before here. Another short seems to be AMD – Firefly Value writes:

Our second-worst performer was a semiconductor company that has spent almost its entire existence at an R&D scale disadvantage to Intel. The company’s response has been to gut both SG&A and R&D to keep cash burn manageable and preserve hope. The bull thesis revolves around an oft-repeated mantra for struggling companies: “this time is different.” Despite the hype surrounding the next product cycle, the company continues to suffer from a scale disadvantage and burn cash from operations. The company’s stock price quadrupled during 2016, but we continue to stand by our research, which indicates that the company’s structural disadvantages will eventually become too large to overcome. This remains our largest short position.

Firefly: Impressive short record

When it comes to shorting stocks, Firefly knows what it is doing. As ValueWalk reported earlier this year, Firefly was seeded by Greenlight Capital’s fund of funds and Greenlight has been impressed with Firefly’s performance over the years:


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