As the year 2022 drew to a close, we wanted to take some time to reflect on our experience investing through the unprecedented turbulence of the pandemic era. We’ve produced a booklet with that goal in mind.
Over the past three years, financial time compressed by an order of magnitude. Crashes came and bubbles went – and then crashes came again. We had a full round-trip cycle in monetary policy, with record easy conditions followed by record tightening. We saw oil trade hands at negative prices, only to see energy prices spike to records across Europe two years later. We watched retail investors worship at the altar of SPAC snake-oil salesmen, and watched cryptocurrency devotees condescendingly tell the rest of us to have fun staying poor, only to see their castles in the sky crumble around them.
You can find a PDF of our writing at the link below. If you have a strong preference for a physical copy, we do have a few on hand; please reach out to us directly at email@example.com.
4Q22 FV Quarterly Letter
Fundamental Value had one of its best quarters to date, returning 34.7% net of fees vs 7.6% for the S&P 500. The strategy has now compounded at 27.4% annualized, besting the market by nearly 16% a year. While it will be almost impossible to maintain this level of absolute or relative performance, we are still very optimistic about the composition of the portfolio relative to the index today.1
Pounding the table on META
At current prices around $110 per share, we think Meta Platforms is one of the best investment opportunities we have seen in our careers.
Meta, the parent of Facebook, Instagram, WhatsApp and Reality Labs, is down about 75% YTD. It has gotten cut in half since the small initial investment we made in Q1 which we blogged about here. As a result of this precipitous fall, the enterprise value is less than $300 billion today, meaning that the company trades at a record-low valuation. While earnings have been disappointing since Q1, our core thesis remains unchanged, and the valuation is now significantly more attractive. We’ve aggressively added to our position, resulting in an average price around $130.
In our Fundamental Value strategy, we generate alpha by identifying scenarios where investors are buying or selling securities for non-economic reasons. We think there are two non-economic reasons investors are overly pessimistic on Meta – one structural, and one behavioral.
3Q22 FV Quarterly Letter
In Q3, Fundamental Value outperformed the market significantly, up 2.5% net of fees versus -4.9% for the S&P 500. On a YTD basis, this puts the strategy up 1.0% net versus the market at -23.9%. Since inception, FV has returned 22.7% net annually, outperforming the S&P by 12.0% a year.1
Over the weekend, we were the lede in a Fortune feature on the Twitter v Musk case. We were honored to be quoted along luminaries including Professors Eric Talley and Ann Lipton (see either the paywalled article, or a PDF version). We are overdue for an update on our biggest position as significant news has come out since we last wrote about Twitter in May.
2Q22 FV Quarterly Letter
Fundamental Value dramatically outperformed the market in Q2, returning -1.4% net of fees versus -16.1% for the S&P 500. This outperformance was due primarily to the gains provided on our short positions, which declined on average -38.4% during the quarter and made a +16.9% contribution to the portfolio.1
We were pleased to be featured extensively in a Forbes article earlier this week regarding our short position in MicroStrategy (MSTR). Despite having plummeted along with the rest of the cryptocurrency ecosystem we believe it still has much further to fall.
Twitter: Musk will be forced to close
Elon Musk is under contract to buy Twitter for $54.20 per share. The deal came together in April after a breakneck negotiation period, during which Musk was so eager to get the deal done that he waived his rights to due diligence.
But since the contract was signed, markets plummeted and Twitter reported disappointing earnings. Based on his tweets, it appears Musk has gotten cold feet:
However, putting a deal under contract "on hold" is not a thing, and we think Musk has no legitimate reason to back out.
Nonetheless, markets appear to believe that he will be able to break the deal, or at least renegotiate a significantly reduced price. Today the stock trades at about $39, a massive discount to the deal price.
This discount represents our opportunity. The Twitter board, if they fulfill their fiduciary duty, will sue Musk for "specific performance," a court order that will force him to close. We believe the board will win easily. In the end, we think Musk will have to buy the company at $54.20. At best, he will be able to negotiate a small discount which the Twitter board might take for deal certainty and to avoid a messy legal battle.
If we're right, we will earn a >40% return on our <$37 purchase price in a 3-12 month timeframe.
We went on Andrew Walker's "Yet Another Value Podcast" to discuss this in more detail, which you can listen to here.
Bireme Capital LLC is a Registered Investment Advisor. Registration does not constitute an endorsement of the firm nor does it indicate that the advisor has attained a particular level of skill or ability. This piece is for informational purposes only. If not specified, quarter end values are used to calculate returns. While Bireme believes the sources of its information to be reliable, it makes no assurances to that effect. Bireme is also under no obligation to update this post should circumstances change. Nothing in this post should be construed as investment advice, and it is not an offer to sell or buy any security. Bireme clients may (and usually do) have positions in the securities mentioned. Advisory fees and other important disclosures are described in Part 2 of Bireme’s Form ADV. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. For current performance information, please contact us at (813) 603-2615.
1Q22 FV Quarterly Letter
Fundamental Value had a solid quarter, essentially flat against a loss of -4.6% for the S&P 500. Our short positions made the difference. Our average short name was down -17% and the short book contributed 5.5% to the quarter’s return. FV has compounded at 24.7% net of fees since inception in 2016, outperforming the S&P 500 by 8.6% annually.1
After disappointing Q1 guidance, the market gods have given us a tantalizing opportunity to buy Netflix stock at nearly a 50% discount from its peak. Investors seem to be extrapolating a one-quarter lull in subscriber growth into a multi-year issue, but we think Netflix will continue growing both users and ARPU for years to come.
As a result of the drop, Netflix stock price is unchanged from Q4 of 2019. This is despite the company generating an estimated $5.5b of GAAP net income in 2022, up from $1.2b in 2019. The stock trades at a ~33x PE ratio today. This is atypically high for our investing style, but we do not think it is commensurate with Netflix’s quality as a company. This is the cheapest valuation NFLX has seen since 2011, when all of its profits were generated by the DVD-by-mail segment. The current price will look progressively cheaper over time: we conservatively estimate that the company will earn more than $30 per share by 2028 and generate billions of free cash flow along the way.
A surprising purchase
Our letters over the past two years have contained an unceasing drumbeat of bubble warnings and excoriations of the speculative frenzy in growth names. Thus, long-time readers will doubtless find themselves confused to see us buying a canonical growth stock that, while historically cheap, nonetheless trades at over 30x earnings.