Greenhaven Road Capital commentary for the month of March 2020, discussing the current COVID-19 crisis and opportunities of buying great businesses with strong balance sheets.
Q4 2019 hedge fund letters, conferences and more
COVID-19 Crisis
We typically reserve formal communication for our quarterly letters. However, these are not typical times. I wanted to let you know that we are seeing a tremendous opportunity for the partnership, and are open for new investment April 1st for those of you who have been searching for opportunities.
I am not an epidemiologist and do not pretend to know exactly when or how we will get through our current COVID-19 crisis. Unfortunately, given the rate of spread, the only thing I am confident of is that the news will get worse before it gets better. More cases will be reported, and more businesses and countries will be shutting down. There will be real costs, both human and financial, across the country and the globe. It is heartbreaking. None of us would have chosen this; however, we are where we are, and we are all assessing our options.
The author Morgan Housel says, “Every past decline looks like an opportunity, every future decline looks like a risk.” With COVID-19, we are definitely in the “looks like a risk” phase right now as the deluge of negative news impacts markets. How much lower will the market go? Another 10% seems likely. Another 20% is certainly hard to rule out.
Opportunites In Buying Companies With Strong Balance Sheets
Regardless of one’s net worth, it is hard to watch hard-earned assets fall. I don’t know where the bottom will be, but I still strongly believe that opportunities are being created. Great businesses with strong balance sheets and outstanding management teams are on sale at increasingly fair/cheap valuations.
What we continue to hold in the portfolio has declined with the market and in many cases in excess of the market, I believe there is embedded value within the portfolio and across the investment landscape. For example, the share prices of small software companies have fallen by more than 50%, and some others have gone further. There are businesses with strong balance sheets benefiting from secular shifts and fortress like balance sheets that have been priced for failure. There are franchise businesses with balance sheets to survive the pandemic that have declined 80%, Any return to profitability over a three-year time frame would imply multi-bagger returns. Some companies have deserved to sell off, but others did not, and therein lies the long-term opportunity.
Currently, our portfolio has more shorts and cash than it has had in many quarters. We will become fully invested again over time, putting the sidelined capital to work in companies we consider attractive both in fundamentals and in current pricing. This will happen before we get the all-clear from the CDC and before a vaccine becomes widely available.
Investing In Special Situations
In times like this, the design of Greenhaven Road should be an advantage. With an investment committee of one, there is no bureaucracy or sacrosanct sector allocations, our fund is intentionally smaller than most which allows us to move quickly and invest in companies of virtually any size. We have the ability to invest in “special situations” and to short companies where the equity may not survive the prolonged closures. We have the advantage of being able to invest across geographies and market capitalizations. This does not mean we will be successful, but given our setup, I believe that we have tilted chance in our favor.
Correlations only have increased in the current market, but eventually, balance sheets will matter, quality of teams will matter, competitive positioning will matter, and business models will matter.
The partnership holds the vast majority of my liquid net worth. If you are interested in joining us, the next window to add capital is April 1st. Please email [email protected] and Ally can walk you through the process.
Even though it does not feel like it today, we will likely look back at these dark days and with the benefit of hindsight, the opportunity will seem clear. Economic conditions will recover and there will be another side of this crisis. For now, stay safe.
- Scott
