Steven Wood, CFA at GreenWood Investors
Please click here to read out first quarter letter to investors. Our great team of managers that we’ve partnered with have posted solid results across the board, yet our portfolio still trades at a 58% discount to year-end 2017 fair values. We’ve also attached a 1-page synopsis of our portfolio to the end of the letter.
Speed read the letter:
- We’ve re-allocated the portfolio to more attractive positions, and have accordingly kept the risk-adjusted return profile at a robust 36.7x, down from 38.2x at the beginning of the quarter
- We’ve reduced the weight of FCA and RACE, yet the downside potential has improved at both and FCA still trades below EBITDA on a forward-looking basis
- We briefly discuss our new position WFM, which is set to improve its results meaningfully at a time when bearishness has peaked and valuation has hit a trough; we are happy to partner with this pioneer of Conscious Capitalism
- We end by explaining upgrades to our selection process that have been implemented over the last year – the expectations vs. reality roadmap and the Conscious Capitalist lens to view quality
We’ve swapped less attractive positions (which became that way through share price appreciation, or in Ferrari’s case, rapid share price appreciation), and have maintained a very attractive and actionable portfolio heading in the the rest of the year. Accordingly, the portfolio’s risk-adjusted return profile moved from 38.2x to 36.7x despite the robust performance of the portfolio in the quarter. This was accomplished through two major ways: by reducing the weighting of very positively-performing Ferrari and FCA and re-allocating to more attractive positions, and rolling our valuations forward on FCA, Ferrari and EXOR, which has reduced the downside of a recession scenario for all of these holdings.
FCA is heading into a softer US market from a much stronger position now that it has successfully launched new products. Early results from Alfa Romeo disprove even bullish estimates, and the company’s new product launches in 2017 will deliver substantial incremental profitability, particularly for its European and North American segments. Even though we believe the US auto cycle is flashing “yellow,” we believe FCA will still handily beat its €16 billion EBITDA target before the end of next year. Furthermore it will have zero net debt soon, so the market capitalization of €15 billion is roughly equal to the enterprise value on a forward-looking basis. It doesn’t take a genius to realize that whether the US cycle is over or not, FCA is still incredibly attractive. Even still, the risk-adjusted return profile did worsen throughout the quarter, and we “fed the birdies,” as our inspiration Wally Carucci would have said.
We are capacity-constrained on doing diligence on all of the ideas we are working on, seeing no shortage of opportunities that peers continue to complain about. One of the many ideas we’ve been conducting diligence on is Whole Foods Market (WFM), and when the government confirmed what our conversations had been telling us, namely that food deflation was over, we began building our position.
This article has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article. Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article. The author’s opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article. GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC.
Past performance is no guarantee of future results.