RBI Capital Partners continued to struggle during the second quarter, along with most other hedge funds looking for a top in the equities market any day now. In the RBI Capital Q2 2018 letter, Managing Member Skip Tague reported that the fund’s long/short portfolio was down 5.2% gross and 5.6% net for the quarter. The short-only RBI Capital Kodiak fund was down 8.8% gross and net for the quarter.
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Year to date, RBI’s long/short fund is down 10% gross and 10.7% net, while the short-only Kodiak fund is down 14.6% gross and net for 2018. At the end of June, RBI Capital Partners had a gross exposure of 161% and net exposure of -39%.
Q2 2018 was tough for RBI
Given the market’s up, up, and away trend for most of this year so far, it comes as little surprise that short-biased investors like Tague are having a difficult time. RBI’s long portfolio produced about 220 basis points of positive alpha during the second quarter, while the short portfolio produced about 510 points of negative alpha.
In the RBI Capital Q2 2018 letter, Tague highlighted the main reasons the fund’s portfolios have been struggling. Essentially, the market is dishing out conditions which run against his investing strategies. For example, volatility has fallen back to low levels again after a brief spike during the first quarter. In the Q1 letter, Tague had noted that the return to volatility was good for RBI, but it ultimately proved to be short-lived.
He also likes to see value outperform growth stocks, but while small-cap value beat growth during Q2, large-gap value underperformed large-gap growth by about 4.5%. Tague said RBI’s exposure to large-gap value stocks took a bite out of its returns.
Momentum remains a thorn in the side of RBI Capital, as it shows no signs of slowing down. He noted that again in Q2 2018, momentum outperformed the mean reversion, which also negatively impacted the fund’s returns. He also thinks the equity markets are ignoring individual company fundamentals, instead allowing macro factors such as economic data to drive valuations.
Short portfolio “performed extremely poorly”
Tague also highlighted the firm’s short portfolio as an area of extreme difficulty in the first six months of the year. He explained that RBI averaged more than 5% in short alpha annually over the last six years, but in 2018 through the end of June, the fund was down 10%.
“That seems like a huge aberration to me,” he wrote. “I have spent considerable time analyzing results, strategies and positions. What worked well for years 2011-2016, stopped working in 2017 and is even worse in 2018.”
He also called out his sizable short positions in major tech stocks with high valuations, which ended up being “too large.” He had thought that increasing interest rates would trigger a mean reversion in those high valuations, but that hasn’t happened yet. However, he’s not ready to give up on his shorts in high-flying tech stocks. He still thinks large-cap tech stocks are in a bubble right now, so he likes his fund’s current position. He expects the short book to perform better in the last six months of the year, but if the last month is any indication of what to expect the rest of the year, it could prove to be a problem area again in Q3.
RBI’s long winners for Q2: Supervalu, Mattel, Express
Supervalu has turned out to be a mixed position for RBI. The long position turned out to be a winner in Q4 2017 but a loser in Q1 2018. However, Supervalu became a winning long again in Q2. Tague finds the grocery store chain’s valuation to be “compelling,” but he has been trimming the position as the stock has rallied, driven by the April earnings report and activist involvement by Blackwells.
RBI’s other top longs during Q2 were Mattel, which Tague said is closing in on the fund’s objective price, and Express, which the fund continues to hold a small position in due to its valuation and strong balance sheet. Tague added that the fund is net neutral on retail now and considering going short on it because he feels sentiment on it has gotten rather euphoric.
Long losers for Q2: Nuance Communications, Knight-Swift Transportation, gold
RBI Capital exited Nuance Communications in Q2 after the stock plunged on the disappointing May earnings release. Tague said they were attracted to the stock in October by its cheap valuation, strong performance and new CEO, but sentiment turned sour after the May release, sending the stock plunging. He was concerned about Nuance’s deteriorating margins and cash flow and high leverage.
Knight-Swift Transportation was also a losing long position for RBI in Q2, but unlike Nuance, Tague continues to like Knight-Swift. He noted this year’s favorable trucking supply and demand, and he feels that Knight-Swift is a “good company in a sector with good fundamentals.” The stock has gotten pummeled this year, but Tague feels the negative sentiment around it is more about the U.S. economy rather than the company and its fundamentals. He expects the stock to outperform in a flat or strengthening economy but fall in a weakening economy.
RBI’s long in the SPDR Gold Shares fund was also a loser in Q2. The hedge fund bought the position in December and added to it in April. At first, it was a profitable position, and then in April, he added to it because he thought there could soon be a conflict with Russia that would give it another boost. However, he said he should’ve reduced rather than increased the position at that time, and he ended up exiting the gold fund in June. You may recall that JHL also exited its long position in gold during Q2.
RBI’s short winner and losers in Q2
Even though Q2 was a difficult one for the short book, RBI did report some solid short positions for the quarter. Tague had been talking up his short thesis for Cimpress in the previous two letters, and after two quarters as a losing position, the short finally became a winner for him in Q2 2018. He estimates fair value at about half the current price, and RBI remains short.
Tague highlighted Netflix as the fund’s biggest loser on the short side. The stock is up more than 100% this year, and although he likes the business, he finds the valuation “extreme.” He drew comparisons between Netflix now and Cisco Systems and Qualcomm in 1999, “great companies that are much larger today in terms of revenues and profits, yet smaller in market capitalization due to valuation compression.” RBI also lost money on Amazon, which Tague is shorting for the same reasons as Netflix.
Two other key short positions in Q2 were Medifast and World Wrestling Entertainment. Tague sees both stocks as “extended by all measures.” Short interest in Medifast is quite low even though the stock has skyrocketed 300% over the last 12 months. Additionally, he expects to cover the WWE short in the event of a correction, which he said is overdue from a technical standpoint. He explained that RBI was “caught in a period of re-valuation” on WWE due to rumors and news surrounding the company’s TV deals.