Vilas Capital letter to partners for the month of September 2019, titled, “Shift (Away From WeWas).”
The markets are undergoing a very large and rapid shift from growth investing to value investing leading the way. We have had our best 10 days in many years. Through tonight’s close, the Fund is up roughly 25% so far in September and 59% year-to-date.
While this may be yet another "head fake", the action in markets tells us that nearly everyone is on one side of the boat. That is, high growth investing or sometimes called momentum investing. While there will certainly be ebbs and flows, we believe that this is the start of something significant for value investors.
As the markets are coming our way, we have been actively striving to reduce our net exposure, partly by selling a few winners and partly by shorting a few extended names. While still above our long term goal, our net exposure is falling rapidly with these actions and the rebound in our equity via dividends and market appreciation. Our goal is to get the Fund into the 0-50% leverage band, with leverage at the higher end of this range after market downdrafts and the lower end after market runs. It may take a while to get to this level, however, but we are working on it actively. Once the excesses are out of the "bubble" stocks, we plan on significantly reducing or eliminating our short positions and just focusing on compounding our capital with profitable, reasonably valued, and growing companies.
Current short positions include Tesla, Netflix, Ferrari, Carvana, Amazon, and Boeing, among others. At the higher quality end, these stocks are trading at 35-40 times earnings estimates. Others have significant losses, such as Tesla and Carvana, and, thus, have infinite valuation multiples. The poor reception of Uber, Lyft and now WeWork, or as we have affectionately called "WeWas", is palpable. The market seems to be choking on dozens, or perhaps hundreds, of money losing companies that are billed as "the next Amazon".
Call us old fashioned but we remember that Sam Walton made money on his first store and every store thereafter. There was no need for massive losses. Good businesses are profitable right away. Ditto for Costco, Microsoft, Starbucks, Google, etc.
This story of huge losses followed by a pot of gold at the end of the rainbow is as ludicrous as believing in Santa Claus or the Tooth Fairy. What is similar, possibly, is the fact that these stories are told to the young who have no experience or ability to tell the difference. For those of us old enough to have seen the long-term realities of business economics, these stories of "losing money on each sale but making it up on volume" seem less plausible than the Easter Bunny.
We have been waiting for a long time for the market to come our way. In fact, it has been a growth dominated market since 2006. The value rotation appears to be starting and it could take many years to run its course. This should be a helpful tailwind as we eclipse our 10 year anniversary in August of 2020 and perhaps extend into the early to mid-2020's, if not longer.
Seven times earnings was ridiculous for a high quality portfolio such as ours, including CVS, Citigroup, Honda, Viacom, Cigna, Daimler, Morgan Stanley, BMW, Abbvie, UBS, Walgreens, Wells Fargo, Lincoln National, etc. The spoils will go to those of us who have been patient and believers in rationality.
Thank you for your continued support.