Hazelton Capital Partners fourth quarter 2014 letter to investors.
Dear Partner,
Hazelton Capital Partners, LLC (the “Fund”) gained 0.6% from October 1, 2014 through December 31, 2014, declined 2.2% year-to-date, and has returned 85.3% since its inception in August 2009. By comparison, the S&P 500 gained 4.9% in the same quarter, increased 13.7% year-to-date and has returned 125.8% since the Fund’s inception.
Hazelton Capital Partners Performance – The Year in Review
Hazelton Capital Partners ended the 4th quarter with a portfolio of 16 equity positions and a cash level equivalent to 25% of assets under management. The Fund’s top five portfolio holdings, which are equal to 36% of the Fund’s net assets, are: Western Digital (WDC), Xerox Corp (XRX), Apple, DreamWorks Animation, and Cisco Systems. Part of Hazelton Capital Partners investing process is to be as tax efficient as possible. Even during a down year for the portfolio, the Fund continued to take profit on a few of its long-term holdings, including Iconix, Wellpoint, Aerovironment, and CME Group which generated strong capital gains. During the 4th quarter, Hazelton Capital Partners eliminated 3 positions while pruning a handful of holdings. A portion of these quarterly sales were executed at a loss primarily to reduce (but not eliminate) the Fund’s tax liability for 2014, with the anticipation that some of these positions may be reestablished at a later date and at a reduced cost basis.
The general market did well in 2014, represented by the solid returns of the S&P 500 and Dow Jones Industrial Average. But below the surface, a divergence in performance was taking place based on market capitalization and economic sectors. Hazelton Capital Partners portfolio was negatively impacted by a downturn in a number of “unpopular sectors” including the oil and retail, as well as an underperformance in many of our small capitalization companies. Most of these declines were driven by short-term market sentiment and not the fundamentals of the company. In 2012, Jeff Kleintop, who at the time was working at LPL financial, released a report showing the average holding period for stocks over the past 50 years had declined from 8 years in the 1960s, to just about 1 year in the 2000s. Representing nearly 70% of all US Equity trading volumes, the frenetic activity of High Frequency Trading (HFT) combined with Exchange Traded Funds (ETF) have continued to drive the average holding period and by 2012 it was down to just over 5 days.
High Frequency Trading is an automated, algorithmic computer program that exploits infinitesimal small changes in stock prices by buying and selling thousands of shares in a fraction of a second. Its sole purpose is to lock in small profits thousands of times during a trading day. Even when excluding the impact from HFT and ETFs, the trend is very clear: Financial decisions have become primarily focused on reacting to shortterm events. Hazelton Capital Partners does not operate in this manner for many reasons, but mainly because we do not possess a competitive edge in short-term directional trading. The Fund’s competitive edge lies in creating a concentrated portfolio of equities on which we have done extensive research, and whose future intrinsic value is significantly higher than where the stock price is trading today. This investing strategy may be easy to understand but is challenging to execute, mostly because one needs to remain patient and override the primordial urge to take action.
In early 2011, Hazelton Capital Partners began building a position in Western Digital (WDC), an unloved and undervalued company which was overlooked by the general market. Throughout 2011 and into 2012, Western Digital stock performance was muddled in obscurity while the overall market maintained its unabated growth trajectory. However, the fundamentals of the company were not only improving, but the entire industry was consolidating, leaving Western Digital with a 45% market share and one of three remaining players in the hard disk drive market. Investing independently of market consensus can be a lonely venture. Looking back over that period of time, there were many days when I questioned my investing thesis, let alone my sanity. However, with the luxury of a longterm investing horizon, Hazelton Capital Partners was able to remain focused on the company’s fundamentals and not market consensus. Had the Fund given in to the conformity of groupthink, it would have missed out on what has been a very significant contributor to the overall growth and strength of the Fund.
Hazelton Capital Partners: Entropic Communications – Closed Position 32% Loss
Entropic Communications (ENTR) operates in a niche segment of the $250 billion semiconductor industry, providing solutions that allow video content to be securely delivered, processed, and distributed into and throughout the home. As the developer and founding member of MoCA (Multimedia over Coax Alliance), Entropic has been responsible for creating the platform on which in-home video networking is based. Except for AT&T, which uses HomePNA (Home Phoneline Networking Alliance), every North American cable, satellite, and telecommunications service provider uses the MoCA standard. The benefit of using coax to distribute content in the home is that it can support the high bandwidth needed for High Definition (HD) video and other broadband services to run simultaneously.
Verizon was one of the first to adopt the MoCA standard, as it needed a way to connect its video service from its newly deployed FiOS (fiber optic) network into the home. But as more cable and satellite companies began offering services like DVR and Video On Demand (VOD) across multiple set-top boxes, the need for a secure, reliable communication into and throughout the home became evident.
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