2Q 2018 Investors Letter

Another quarter in the books, which marks two quarters now that I’ve been updating this blog. That feels good. I know that on average 3 people a week read my content, but I don’t really care. I am creating a database of information for those interested to go back and look, find out where I got it right, and (more easily) find out where I got it wrong. Hopefully along the way I’ll make some nice investments and beat the S&P 500 on an absolute annual basis.

For the 2Q 2018, the Voyager Fund returned 0.40% compared to the S&P 500 return of 2.88% and Russel 2000 performance of 7.43%. My thoughts? I am not bothered in the slightest, and neither should you if you are reading my material. I fully expect to be judged on my 5 year track record when that time comes. Quarterly performance, whether above or below an index, should be treated as blips on the screen. However, much of this under-performance can be attributed to how I value the portfolio. I currently take the net asset value of my portfolio excluding current positions that I’m holding. In other words, if I have assets that are gaining in value but I do not sell them, they will not trickle down to the bottom number that I use. Going forward I am not sure if that’s the best way to value and reflect the performance of the Fund, and frankly I am still extremely naive at how to communicate my performance with others. I’m getting better, I’m reading countless quarterly letters from the investors I admire, and I’m not ashamed to say I try to copy how they deliver performance overviews to their investors.

On a 1-Year Basis, the Voyager Fund has returned 16% compared to the S&P of 12.54%, beating the index by close to 400bps. Once again, the farther the time frame you use, the more accurate your judgement of my merit as an investor will be. I am happy with this result as my goal is to outperform the S&P on an annual basis over at least 5 years. Remember, I don’t set an index for myself, because I don’t really care what the index is doing, rather it provides a benchmark for potential capital allocators / partners should they be interested in wanting me to invest for them. With legalities out-of-the-way, let’s dive into the trades I made this past quarter, the winners, the losers, and everything in between.

Winners, Losers, and Scratches

This quarter saw only two positions closed for a profit, 7 positions closed for a loss, and 4 positions closed for scratches. The turnover was a higher in this quarter than previous quarter. The main reason for this turnover was due to finding much better investments, cutting my losers / dead-weight positions, and funneling that capital into my higher conviction picks.

The Losers

First loser for the quarter was long Natural Alternatives International (NAII) for a 21bps loss. I wrote a piece on NAII as a net – net health foods company. Valuations were cheap and price movement was nice. However, after price failed to break the resistance level of 12.50, it retreated back down, hitting my stop – loss. It is still on my radar.

The second losing position came from my long on silver. Silver made (what appeared to be) a killer wedge pattern and broke out on the weekly charts. I entered a 60bps position. Quickly thereafter, price retracted and headed south. I didn’t like the abrupt reversal of price so I quickly cut my losses at 22bps. Silver has been a bit of a “trouble child” for me in my trading. It’s currently heading back down towards the lower bound of its wedge pattern. Naturally it is still on my radar (remember, by keeping my losses small I can afford to take multiple stabs at a trade!)

My third losing position came from long Aegon N.V., a Netherlands insurance company. The company reported strong fourth quarter earnings, so on the back of good news I entered a long position for 50bps capital. Price action moved in my favor, but I kept my stop-loss far enough away so that I wasn’t shaken out prematurely. Price made a peak in late April, and a mixed quarterly report sent the share price tumbling. I got out with a 23bps loss. Looking back, I am glad I got out when I did as price has now descended below the 200 and 50 MA.

The fourth losing position was a stupid mistake that I hope to never make again. So a bit of a back story. I follow the website tech charts.net, which is an amazing website for classical charting principles. They also release potential trades based on price action. ACWI (All World Index) was forming a nice consolidation / wedge pattern, and was about to break out on the upper bound. I entered a position worth 70bps. Price quickly retreated and I exited for a 30bps loss. The open risk did not match my conviction / due diligence. So, going forward, I will make sure to keep the more “speculative” plays on the short side of the risk curve, while leaving more of the capital for my higher conviction investments.

My next losing position was PDL Biopharma (PDLI). I have followed this stock for around 3 years, I even called the CFO and chatted with him about the company. I love where they’re going (moving from royalty streams towards more of M&A of durable pharmaceutical companies), but their share price hasn’t budged. I am keeping them on my radar, but for now, this is one of those scenarios where I deemed that money “dead – money” and had plenty of other investments to deploy that capital in a more active fashion. I took a 20bps loss.

The last loser is Yatra Online! (YTRA) for 29bps. I learned from my last mistake with YTRA and eased into the position, risking only 30bps to start. However, I still made the mistake of taking a position right before an earnings call. During that earnings call, the company announced that it would do a share offering for $5.50/share. This was bad news because I bought my shares in the $6s. I ended up riding the share price down to my initial stop and took the 29bps loss. The last two trades in YTRA left an awful taste in my mouth, but I am trying my hardest not to let it affect my judgement on the company, because it is a good, growing company. I hope I am not naive enough not to reconsider the investment if good news surfaces.

Post Mortem: The Losers

In order to track my progress, and in order to change where I need to change as an investor, it’s important for me (and for you as the reader) to understand what lessons I take from my failures. Going forward, I am placing a higher importance on conviction levels and its correlation with the sizing of positions. I have already done this for my new entries, but it is something I learned the hard way by taking losses that were larger than what they needed to be. Secondly, when it comes to buying shares of a company, I won’t try to buy right before an earnings call. That was a combination of laziness on my part in not checking, and the belief that they earnings call would be good (which it was, minus the whole share offering thing).

The Winners

I only sold out of two profitable positions in 2Q 2018, Big Five Sporting Goods (BGFV) and Francesca’s (FRAN). BFGV ended up being a big winner for the Fund, returning around 1.50% on a 45bps risk investment. Price shot up almost immediately after purchasing the shares, and I ended up buying on what would be the bottom for the quarter. So why did I sell? I sold for a couple of reasons. First, price action wasn’t advancing in my favor. Price was losing steam, and the charts became less and less favorable as the quarter dragged on. I set my stop losses below the 50MA on the daily charts, and locked in that 150bps gain as a worst-case scenario. Unfortunately price hit my stop-loss and I was bumped out of the trade. Looking back, I’m glad I got out because share price has yet to regain that previous level of when I sold.

My second profitable trade was in Francesca’s Holdings (FRAN). This was without a doubt the most frustrating trade I’ve made since starting this blog. I did almost everything right. I say almost because I did the one thing I hate: I didn’t listen to my conviction, and let outside opinion infiltrate my conviction levels. The company released an earnings report that was mixed. Revenues were up, but earnings missed pretty badly. So, instead of staying convicted to my longer term view of the turnaround taking place within the company, I exited for a quick 20bps gain. “Good job avoiding that pitfall”, is what I kept telling myself. However, the beautiful thing about Mr. Market is that he will humble you, he will ALWAYS humble you. Shortly after selling my position, the stock shot up and never looked back. Had I held on for merely another week – two weeks, I would have made 100% gain on my initial investment.

Post Mortem: The Winners

This was a tale of two trades: good and bad execution. I don’t want to beat myself up too much on the direction of the price of the stock after I sold, because in reality, the odds of price moving the opposite way are just as likely. What I want to stress from these trades is this: “Did I stick to my process? Did my conviction levels match my process?” Price will do what price does. I can’t control the price movements. What I can control is my process. Going forward, I won’t haphazardly move my stop losses up due to one missed earnings report. However, I will take a positive from my exit with BGFV: I placed my stop losses properly and executed to perfection.

New Additions to The Fund

So far in 3Q I’ve added three names to the Fund, all of which are high conviction investments, and they’re companies I’m excited to own because I believe I’m getting them at discounts to what they are truly worth. The names are Hostess Brands (TWNK), Live Ventures, Inc. (LIVE), and Carriage Services (CSV). All three businesses are great businesses with fantastic business models, sustainable cash flows, and durable competitive advantages. I won’t go into too much detail on each investment because I’ve written lengthily pieces on each of them in this blog (I invite you to check them out!). However, I would like to take some time and do a quick recap on what kinds of businesses we are invested in.

Hostess Brands is the latest company to enter The Fund at a 100bps open risk level. You already know what Hostess Brands makes, so that makes my job easier! The manufacturer of delicious baked goods is fresh out of bankruptcy with a mission on increasing their moat, sustaining their industry leading margins, and producing consistent sustainable cash flows. The company has an 80% premium on pricing compared to its competitors which allows it to expand margins without reducing total number of sales. The past quarter TWNK bought Cloverhill Bakery, a breakfast bakery in Chicago for quarters on the dollar. This is part of TWNK’s mission of expanding their brand and getting into the breakfast market (a move that will inevitably drive revenues and EBIT higher). Using a DCF model I put a fair value of TWNK in the $19 – $20 range, and I started accumulating shares at $14. I will continue to accumulate shares if price breaks above $14.20.

Live Ventures (LIVE) is an awesome business. Think of LIVE as a Baby Berkshire Hathaway. The company specializes in acquiring smaller businesses that generate consistent earnings, have durable moats, and are able to produce predictable cash flows over time. CEO of LIVE Jon Isaac used close to 25% of his own capital to bring LIVE out of bankruptcy, re-branding it from its former name (YellowPages.com). Management has extreme amounts of skin in the game, and CEO Jon Isaac is a stud at what he does. The numbers also speak for themselves. Since Isaac took over the company, book value has grown at an annual average rate of 120%.

Finally, Carriage Services (CSV) is a funeral home business that consolidates private funeral homes, puts them under the Carriage Services name brand, but lets the owner stay the owner while incorporating the Carriage Service operations of the business. The company is big on entrepreneurship, and the culture screams innovation. There is much to be consolidated in the funeral home industry, and Carriage Services is well positioned to take most of that consolidation. Plus, this business is great. People never stop dying (those that like the darker side of humor will appreciate that).

Concluding Words

This last quarter was equally as enjoyable as the first quarter. The underperformance doesn’t phase me, and it shouldn’t phase you. I am extremely optimistic about the portfolio of companies we are invested in, and 3Q 2018 is already setting up to be a great. I sleep well at night knowing I’m invested in good quality businesses with management teams that really care. Along with our new additions to the Fund, companies such as EGY, FNJN, and ADES are all making progress in increasing their shareholder value. I’ve learned a lot this quarter, and it’s been a privilege to write these letters to you, no matter how few may read them. Until next quarter!