ADW Capital Partners commentary for the first quarter ended March 31, 2017.
First see a brief excerpt from their email to investors
Partners and Friends of ADW Capital:
As you will see from the numbers below, we are having a very strong start to 2017. More importantly, the performance is in line or AHEAD of our NET ANNUALIZED return since inception of +28.16% or to put it another way, each dollar invested at the launch of the fund is now worth close to $4.81.
In running a concentrated portfolio, quarter-to-quarter volatility can and should be expected. That being said, we continue to find extremely attractive investments. In fact, in the fourth quarter of 2016 we added a new core holding that I am very excited about and was recently profiled in the most recent edition of Value Investor Insight – a prestigious subscription newsletter. If I am close to right about its prospects, it can return multiples of our capital over the coming decade.
If you are interested in adding to your account or opening a new account the next deadline is June 1st.
And, please take the time to read our 1st Quarter Letter (attached). There is a good deal of analysis on our strategy, ethos, and philosophy toward the Fund.
Thank you again for your continued support.
Below please find the un-audited APRIL and 2017 YTD performance update for ADW Capital Partners, LP*:
|Since Inception (Jan 2011)|
|*Assumes a 2%/20% fee structure. Individual investor returns may vary based on the timing of subscriptions.|
ADW letter below
It is our pleasure to report results for the 1st quarter of 2017 and our 25th quarter since inception.
At the risk of sounding like a broken record, we want to reiterate a critical point discussed in all quarterly letters. ADW Capital Partners, L.P. (the “Fund”) operates a concentrated, tax-sensitive and long-term strategy designed to minimize correlation to the broader indices with a focus on avoiding permanent capital loss. Inevitably, this approach will result in periods of underperformance. By the same token, our efforts to maintain a lower correlation strategy driven by company-specific outcomes may produce significant outperformance in periods of market weakness, as we saw in 2011. We are not traders, return chasers or month-to-month stock jockeys. We are investors who look for opportunities to return multiples on the Fund’s capital in a tax-efficient manner over an extended period of time. While this strategy may yield lumpy results, we believe it limits idea dilution and protects the Fund’s returns from Uncle Sam and Wall Street.
ADW Capital Partners – Quarterly Update:
The celebration of the Passover holiday last month reminds us of the importance of asking questions. The tradition of asking the four questions around the seder table is rooted in ancient times, however the purpose of Passover in our personal lives today is about freeing oneself from internal constraints by asking fundamental questions. It is in that spirit that we at ADW Capital find ourselves asking our own set of questions.
“Why is this quarter different from all other quarters?”:
In our fourth quarter letter, we discussed the quality of our capital base which through proper education and conditioning has allowed us to weather some “difficult times” on a “mark-tomarket” basis. In fact, some of you even took the opportunity to add to your accounts and take advantage of what I would call “stock market deviation from business
You may ask yourself what does that mean…..?
To answer that question, you must first answer two other questions: You must first ask yourself what makes stocks of companies go up and down and what is a stock? Let’s start with the latter.
A “stock” – generally – is a share of a company which represents some fractional ownership of a business. This fraction of a company – generally – entitles you to certain intangible rights like voting and certain economic rights — “the earnings per your share” which can either be reinvested in its own shares, back into the underlying business, or distributed through dividends.
Generally, with the exception of tech titans like Amazon and Tesla, companies that over time grow their earnings per share become more valuable as they have more money to either grow through re-investment or distribute to shareholders. This mechanism of becoming more valuable is incremental buyers or existing owners of the Company buying more and driving up the price on expectation of future growth in earnings and future potential capital return – dividends / share repurchases. This maxim/fundamental reason for what drives stock prices is basically the only maxim we subscribe to.
So, we have defined what a stock is and what – generally – influences stock prices to go up. But what makes them go down? Well, sometimes investors get overly ebullient and drive prices to a level where the expected earnings growth/shareholder return is already “priced in”. Sometimes, a company’s growth misses “expectations” and can force a stock to trade down. If the quality of the business/management team is good and the business model has great long term characteristics / runway these are usually great buying opportunities. Other reasons stocks of companies would go down is if the company’s business model is getting disintermediated or losing market share to competition. If a company quits growing or its earnings start declining then the business becomes less valuable and would cause shareholders to sell. These two reasons would be fundamentally why we would either sell a long holding or short shares of a company. There are many other nuances – capital structure, refinancing issues, cyclicality, etc. but they are all generally captured above.
But why else do stocks go down?
One reason stocks go down (and up for that matter) is indexation and more broadly “factor”/sector capital flows. Certain companies are grouped into indices for certain investors who want to get long or short a certain sector but don’t want to take single company risk. If investors want to own more or less of a certain index then the index creator has to buy more or sell more of the individual constituents of that index.
For example, in early 2016, a lot of foreign capital was “short Italy” based on a perceived imminent banking crisis and political uncertainty over its upcoming referendum/elections. So, to be “short Italy” someone needed to sell more of the underlying components of the index – driving down the prices of individual companies. Companies like Fiat (FCAU) and Ferrari (RACE) for reasons that had nothing to do with their own business performance were sold off because they were included in an index. We knew that the underlying fundamentals of these businesses were intact. In fact, it was our belief that not only was the growth of these businesses accelerating but that consumer confidence in Italy was strong and the economy there was poised for acceleration. While the short term “mark-to-market” was painful, we knew the fundamentals were there to support and grow prices over the longer term.
Another reason stocks go down (which we really like for buying opportunities) is non-economic selling. This is expressed in a few different ways. For example, when a big company