Gator Focus Fund’s semi-annual shareholder letter.
Dear Gator Focus Fund Shareholders:
We are pleased to provide you with the Gator Focus Fund’s (the “Focus Fund”) semi-annual shareholder letter. This letter covers the semi-annual period for the fiscal year ending March 31, 2015. Below, we have provided (1) an update regarding the Gator Focus Fund’s performance, (2) a summary investment thesis behind two new positions added during the period, and (3) a list of the Focus Fund’s top ten equity holdings as of September 30, 2014. We hope that our overview and description of our investment theses behind our recent purchases will help you to understand the analysis we perform on positions we purchased for the portfolio during this period.
Gator Focus Fund – Review of Performance
We believe the Gator Focus Fund differentiates itself by holding a concentrated stock portfolio of relatively small companies, which we generally hold for significant periods of time resulting in relatively low turnover. The Gator Focus Fund outperformed its benchmark, the Russell 2000 Index®, from the Focus Fund’s inception on April 24, 2013 through September 30, 2014. Returns for the Gator Focus Fund and its primary benchmark, the Russell 2000 Index® for the period April 24, 2013 through September 30, 2014 are summarized below:
During the six month period we had a few strong performing investments, such as Targa Resources Corp (NYSE:TRGP), Teekay Corporation (NYSE:TK), and Enlink Midstream Inc (NASDAQ:XTXI). In June, Targa was reportedly engaged in merger talks with Energy Transfer Partners LP (NYSE:ETP). In September, Teekay Corporation announced that its Board of Directors intended to increase its dividend payments substantially in 2015. EnLink Midstream (formerly Crosstex Energy) continued to perform well as it integrated its merger with the midstream assets of Devon Energy Corp (NYSE:DVN).
However, we also had positions that did not perform well. For example, Cumulus Media did not perform well as it reported lower EBITDA (Earnings before interest, taxes, depreciation, and amortization) due to turnover in the morning radio show talent in several large markets. We continue to hold our Cumulus Media position because we believe the stock is priced attractively and anticipate that its performance may improve in 2015. Rex Energy was another underperforming position in this period due to declining oil prices. We continue to hold our Rex Energy Corporation (NASDAQ:REXX) position because we like the progress they’ve made in drilling wells in acreage in the Marcellus Shale. Our Ambac warrant position underperformed during the period as investors grew impatient waiting for Ambac to settle its lawsuits with Bank of America and JP Morgan Chase.
Gator Focus Fund – Recent/New Positions
This section reviews our investment thesis for two new positions we purchased in the Fund between April 1, 2014 and September 30, 2014. We hope these summaries provide you some insight to how we make stock selections.
As a reminder, the discussion of individual securities should not be construed as a recommendation to buy or sell such securities.
Gator Focus Fund – FTD Companies
FTD Companies Inc (NASDAQ:FTD) is a floral and gifting company. The company is best known for the FTD Network through which consumers can order flowers at their local floral shop for delivery to the recipient in another city. The local florist takes the order, collects payment, and transmits the order over the FTD Network to a florist in the recipient’s city who delivers the flowers. We believe the FTD Network is an attractive asset-light business with a network effect that gives FTD a defensible competitive advantage.
FTD Companies Inc (NASDAQ:FTD) went public in November 2013 when the company was spun-off from United Online, Inc. (NASDAQ:UNTD). This is the third-time that FTD has been a public company. In 1994, FTD was demutualized by Perry Capital and was publicly traded. In 2004, the private equity firm, Leonard Green, took FTD private. FTD held another IPO in 2005. In 2008, United Online acquired FTD. This history shows that the high-margin stable nature of the FTD network has been attractive to private-equity buyers in the past.
In July 2014, FTD announced an interesting transaction that we believe improves the FTD investment case. FTD announced that it was acquiring Provide Commerce from Liberty Media. Provide owns many different flower and gift brands, but the most significant is ProFlowers. Liberty is controlled by cable TV mogul John Malone. Malone has a long history of value enhancing deal making. In the FTD/Provide deal, Liberty will retain a 35% stake in the combined company and get 4 board seats. We built a position in FTD shortly after the announcement of the Provide Commerce acquisition.
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