Grey Owl Capital Management’s letter to clients for the quarter ended April 2014.
The broad equity market displayed a fair amount of volatility during the quarter, but essentially went sideways. This pattern continued through April; 2013’s losers became 2014’s winners and vice versa. In the broadest sense, bonds narrowly beat stocks on the heels of 2013’s thorough drubbing. The Barclays Aggregate Bond Index (as measured by the AGG ETF) was up 1.77% for the quarter, while the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) (as measured by the SPY ETF) was up 1.70%. Gold, gold miners, REITs, and emerging market bonds were all negative in 2013 and are positive in 2014. US small caps, biotech, and social media were 2013’s leaders and were all down in the first quarter of 2014.
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Despite the market’s noise and our defensive posture, Grey Owl’s portfolio performed well in the first quarter. Below, we discuss the current environment and provide details behind two investments we initiated during the quarter. First, here is the performance table for the Grey Owl Opportunity Strategy as of March 31, 2014:
Grey Owl’s Portfolio Adjustments
We made modest portfolio adjustments in the first quarter. At the beginning of the period, the Grey Owl Opportunity Strategy had 74% exposure to equities. After three buys and three sells, we ended the period pretty much where we started at 73% equity exposure. Despite our continued defensive posture, we outperformed the broad equity market (defined by the S&P 500) through security selection. Our top five performers (on a size-weighted basis) for the quarter were World Wrestling Entertainment, Inc. (NYSE:WWE), Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX), Annaly Capital Management, Inc. (NYSE:NLY), Ultra Petroleum Corp. (NYSE:UPL), and Express Scripts Holding Company (NASDAQ:ESRX).
On the buy side, we added to National-Oilwell Varco, Inc. (NYSE:NOV) and initiated new positions in Post Holdings Inc (NYSE:POST) and Priceline Group Inc (NASDAQ:PCLN). As we write this letter, NOV is our third largest position constituting almost 6.5% of our portfolio. Our investment theses for Post and Priceline are described below.
On the sell side, we trimmed our exposure to Valeant and World Wrestling Entertainment. Both securities experienced rapid gains into the end of January following their substantial appreciation in all of 2013. In the spirit of “bulls make money, bears make money, but pigs get slaughtered,” we chose to take some money off the table.
You can find a full description of our VRX thesis in our third quarter 2013 letter. We continue to believe Valeant has a long runway and that CEO Michael Person is an exceptional steward of shareholder capital. He is a true “Outsider” (see POST discussion below for a definition). Even after trimming half of our position at close to $137/share, VRX remains a core holding. It is our seventh largest position at just under 4% of the portfolio. As we were writing this letter, Valeant and Pershing Square (a large “activist” investment firm) revealed a plan to consummate VRX’s long sought “merger of equals” with Allergan, Inc. (NYSE:AGN). We are optimistic about this possibility and believe it will add substantially to Valeant’s intrinsic value.
WWE is now our smallest position. As we described in our last quarterly letter, this was a short-term, catalyst driven idea. While the catalyst (a new TV contract) has not yet materialized, the stock price incorporated most possible upside scenarios during the quarter and we trimmed the position twice as the price rose.
Our final sale was one of our oldest positions. After a series of buys and sells dating all the way back to the mid 2000s, we completely exited our Microsoft (MSFT) position booking reasonable, but not spectacular, returns. We still saw upside in many of Microsoft Corporation (NASDAQ:MSFT)’s enterprise offerings. However, at the end of the day, MSFT’s leadership appeared disorganized at best. A major corporate realignment was announced, then a somewhat inconsistent hardware acquisition (Nokia), and then the resignation of the CEO who orchestrated both moves.
See full letter: Grey Owl Up 14% In 2014, With Gains On WWE, VRX, ESRX, NLY
Full letter via: greyowlcapital