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gorodenkoff
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Merion Highway Small Cap Fund |
IWM (Russell 2000) |
Barclay Hedge Fund Index |
MRCM Lengthy Solely Giant Cap |
SPY (S&P 500) |
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|
Annualized Since Inception |
15.5% |
7.5% |
4.9% |
Annualized Since Inception |
10.6% |
10.1% |
|
Q3 2023 |
(3.1%) |
(5.2%) |
(0.4%) |
Q3 2023 |
(2.6%) |
(3.2%) |
|
2023 YTD |
0.3% |
2.5% |
3.9% |
2023 YTD |
25.9% |
13.0% |
|
2022 |
(16.9%) |
(20.4%) |
(8.5%) |
2022 |
(34.9%) |
(18.2%) |
|
2021 |
42.5% |
14.5% |
10.0% |
2021 |
20.4% |
28.7% |
|
2020 |
29.5% |
20.0% |
11.0% |
2020 |
54.3% |
18.3% |
|
2019 |
17.9% |
25.4% |
10.6% |
2019 |
25.2% |
31.2% |
|
2018 |
15.7% |
(11.1%) |
(5.2%) |
2018 |
(6.0%) |
(4.6%) |
|
2017 |
35.7% |
14.6% |
10.3% |
Dec 18 – Dec 31 |
0.1% |
(0.5%) |
|
2016 (Jul-Dec) |
1.3% |
18.7% |
5.4% |
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Word: All returns are web of administration and efficiency charges. Previous efficiency shouldn’t be indicative of future outcomes. Returns for the Merion Highway Small Cap Fund for the interval previous to fund launch (01/13/22) replicate a basket of SMAs. |
The Lengthy Solely portfolio fell 2.6% in Q3. I continued to peel slightly off of our tech names like GOOG, AMZN, and NOW. These nonetheless stay important holdings for us, however have turn into comparatively much less engaging as their valuation has recovered, charges have elevated, and different shares have lagged.
Through the quarter I established a brand new place in Summit Supplies (SUM). SUM is a development supplies supplier with about 40% of their income from aggregates and cement, 30% from ready-mix concrete, and the remaining from asphalt and paving. I’ve adopted the aggregates and cement business for a few years and have all the time been interested in it. What’s to not like given the dearth of substitutes, restricted competitors attributable to allowing and transportation prices, and long-term demand progress. With the vast majority of product serving public development wants, the business ought to profit from the just lately handed infrastructure payments which have but to really hit the market.
In early September the corporate introduced that they might purchase the U.S. operations of Cementos Argos (OTCPK:CMTOY), a Colombian cement firm. The market didn’t just like the transaction as SUM subsequently traded down over 20%. Whereas this transfer was not completely unwarranted, I assumed it was extreme and used the sell-off to ascertain a place. To be truthful, SUM paid up for the property (10x EBITDA) and I wouldn’t be shocked if Argos had underinvested in them / they require further capital.
On the flip aspect, this acquisition will shift SUM’s enterprise combine to the extra steady and better valued enterprise strains of aggregates/cement. Moreover, it will increase the corporate’s publicity to progress states like Florida, the Carolina’s, and Georgia. Add within the potential of operational synergies and high-return capital investments, and this deal won’t be so dangerous in any case.
The Small Cap Fund was down 3.1% in Q3. I did some repositioning on this portfolio as nicely. Notably I absolutely exited our place in Westwood Holdings (WHG). I miscalculated on administration right here and in the end realized that any worth within the enterprise will proceed to get siphoned away to staff.
As it’s possible you’ll recall I wrote up Distribution Options Teams (DSGR) in my final letter. In late September that they had an investor day throughout which they did a deep dive into their enterprise strains and highlighted the assorted methods to drive income, profitability, and stability of earnings. Whereas administration had quite a bit to say on these points, what stood out to me was their deal with driving worth added companies which in flip results in increased profitability and buyer retention. DSGR is making the upfront funding right this moment in each individuals, to serve complicated wants of buyer, and bodily property.
As the corporate beneficial properties scale, these prices get unfold out over a bigger base and drive additional profitability. Administration put out a 5-year aim of $5+ in earnings energy per share which might be extremely welcomed on condition that shares are at the moment buying and selling for a bit over $30. Whereas the inventory value has understandably appreciated with the elevated disclosure and long-term targets, it stays engaging even when they only get within the ballpark of their targets.
Because the quarter ended I’ve constructed a small- to mid-sized place in WK Kellogg (KLG). KLG is the North American enterprise spun-out from the enterprise previously often known as Kellogg. There’s a ton of pessimism round this firm. Two weeks earlier than the spin the Wall Avenue Journal put out a scathing article on the cereal business titled “It’s the Breakfast of Champions No Extra: Cereal Is in Lengthy-Time period Decline.” Unrelated, Ozempic and different GLP-1s have been a subject dejour and deemed to be an enormous headwind to any unhealthy meals product.
Business points apart, KLG has just lately carried out worst amongst the large three (Put up and Normal Mills being the opposite). In 2021 their manufacturing was stymied by a hearth at their plant in Memphis and a strike by 1,400 individuals; manufacturing lagged and KLG usually misplaced share. Add in the truth that the spin accounted for under ~5% of the worth of the father or mother firm and it is smart why most legacy shareholder receiving the inventory would like to dump it into the market.
KLG owns extremely recognizable and established manufacturers like Frosted Flakes, Raisin Bran, Particular Okay, Fruit Loops, and even Kashi for the health-conscious shopper. They’ve traditionally generated about $2.8bn in income however EBITDA margins have been solely within the mid- to high-single digits. A part of this may be defined by being a small a part of a a lot bigger firm. Some manufacturers have been run individually from others, geographies have been break up, and the gross sales power was chargeable for promoting not simply cereal however the entire arsenal of Kellogg product.
By eliminating silos and having a devoted gross sales power administration hopes to drive margin enchancment and regain misplaced share. Extra importantly, nonetheless, they plan to speculate a number of hundred million into their outdated manufacturing amenities. Administration is concentrating on a 5% margin enchancment over the following couple years which might nonetheless depart them beneath Put up, which operates within the 15%-20% vary. If margins don’t transfer up a lot from right here earnings are in all probability within the $0.75 vary placing the inventory at 13x.
Assuming working margins enhance 3% off LTM figures (to account for any incremental depreciation expense) we might get to $1.50 in earnings or lower than 7x. This all compares favorably to Put up and Normal Mills multiples within the mid-teens. Whereas there’s a lot to dislike about KLG, the chance return appears engaging.
Sincerely,
Aaron Sallen
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Normal Disclaimer This materials doesn’t represent a suggestion or the solicitation of a suggestion to buy an curiosity in Merion Highway Small Cap Fund, LP (the “Fund”), which such supply will solely be made by way of a confidential personal placement memorandum (the “Memorandum”). An funding within the Fund is speculative and is topic to a threat of loss, together with a threat of lack of principal. There isn’t any secondary marketplace for pursuits within the Fund and none is anticipated to develop. No assurance may be on condition that the Fund will obtain its goal or that an investor will obtain a return of all or a part of its funding. All statements herein are certified of their entirety by reference to the Memorandum, and to the extent that this doc contradicts the Memorandum, the Memorandum shall govern in all respects. This materials is confidential and might not be distributed or reproduced in entire or partially with out the specific written consent of Merion Highway Capital Administration, LLC (the “Funding Supervisor”). The data and opinions contained on this doc are for background functions solely and don’t purport to be full or full. Until in any other case acknowledged, the data on this doc shouldn’t be customized funding recommendation or an funding suggestion on the a part of the Funding Supervisor. The efficiency information mentioned herein don’t symbolize the efficiency of the Fund, however slightly, symbolize the unaudited efficiency of a basket of individually managed accounts managed by the Funding Supervisor pursuant to the identical technique anticipated to be carried out for the Fund. Outcomes generated within the Fund as soon as outdoors capital is admitted might be materially totally different than these outcomes proven. The outcomes proven replicate the deduction of: (i) an annual asset administration price of 1.5%, charged quarterly; (ii) a efficiency allocation of 15%, taken yearly, topic to a “excessive water mark;” and (iii) transaction charges and different bills truly incurred. The administration price and efficiency allocation have been utilized retroactively and don’t replicate precise charges charged. Not one of the outcomes proven replicate the deduction of sure organizational and working bills widespread to funding funds, which might serve to lower earnings or in any other case enhance losses. Outcomes have been achieved utilizing the funding methods described within the Memorandum. Outcomes are in comparison with the efficiency of the Russell 2000 Index, the Russell Micro-cap Index, and the Barclay HF Index (collectively, the “Comparative Indexes”) for informational functions solely. The Fund’s funding program doesn’t mirror any of the Comparative Indexes and the volatility of the Fund’s funding program could also be materially totally different from the volatility of the Comparative Indexes. The securities included within the Comparative Indexes should not essentially included within the Fund’s funding program and standards for inclusion within the Comparative Indexes are totally different than standards for funding by the Fund. The efficiency of the Comparative Indexes displays the reinvestment of dividends, as acceptable. This materials accommodates sure forward-looking statements and projections relating to market developments, funding technique, and the long run asset allocation of the Fund, together with indicative tips relating to place limits, exposures, place sizing, diversification, and different indications relating to the Fund’s technique. These projections and tips are included for illustrative functions solely, are inherently predictive, speculative, and contain threat and uncertainty as a result of they relate to occasions and rely on circumstances that may happen sooner or later. The rules included herein don’t replicate strict guidelines or limitations on the Fund’s funding program and the Fund might deviate from the rules described herein. There are a selection of things that would trigger precise occasions and developments to vary materially from these expressed or implied by these forward-looking statements, projections, and tips, and no assurances may be on condition that the forward-looking statements on this doc will likely be realized or adopted, as described. These forward-looking statements won’t essentially be up to date sooner or later. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
Editor’s Word: The abstract bullets for this text have been chosen by Searching for Alpha editors.
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