Bireme Capital LLC is an SEC 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. The performance described above is the performance on a dollar weighted average of the securities in all Bireme accounts invested in the FV portfolio. Changes in investment strategies, contributions or withdrawals may cause the performance of your portfolio to differ materially from the performance displayed. 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. SPY ETF performance includes expenses as well as reinvested dividends. For current performance information, please contact us at (813) 603-2615.

FV edged out the market in Q1, returning 6.1% before fees vs 5.9% for the SPDR S&P 500 ETF (SPY). This brings the portfolio’s annualized outperformance, after typical fees, to 10.9% since inception.¹

We made one new investment in the quarter, the French holding company Bollore SA. We had been following Bollore for about two years, ever since a positive report on the firm was released by noted short seller Muddy Waters. In this report, a rare buy recommendation for the outfit, Muddy Waters claimed that the effective share count of Bollore was less than one half of the official number. This is important, as a halving of the share count doubles the value per share, all else equal. If Muddy Waters was right, and other investors were relying on the public share count, the stock might be undervalued indeed.

After watching the stock slide from 5 euros per share to 3 euros since early 2015, we decided the time was ripe to match Muddy Waters’ work with our own research. Despite a very complex corporate structure, we were able to approximate and confirm Muddy Waters’ view that Bollore SA essentially owned more than half of its own shares. At most firms, these are called “treasury shares” and excluded from the share count. In Bollore’s case, however, they are owned indirectly through a series of holding companies, and are not excluded. This leaves the share count artificially inflated.

Having confirmed the share count issue, we set to work on understanding the quality of the business itself. We came away impressed. The largest business segment focuses on logistics, helping organize air and sea shipping for manufacturers worldwide, while also owning some of the ports that receive these (and other) shipments. This business has increased operating income from $195m to $545m since 2005.

With the capital generated from the logistics and other business, Chairman and CEO Vincent Bollore has made a number of successful investments over the years, with the current largest positions in French media companies Havas and Vivendi. As a result of Mr. Bollore’s stewardship, book value per (official) share has increased from 0.33 Euros in 1995 to 3.95 Euros in 2015, equivalent to growth of 18% per annum. We like the prospect of investing alongside Mr. Bollore, especially given a current price that is at a large discount to our estimate of intrinsic value.

To demonstrate this discount, consider the earnings multiples of Bollore’s competitors in the logistics business:

When excluding treasury shares, we estimate that Bollore trades at roughly ten times 2016 earnings per share, less than half the median of this group. We think Bollore SA will see strong returns to investors if a portion of the discount closes.

During the quarter, there were three significant contributors to Fundamental Value’s returns: Apple, Samsung Preferred Shares, and 21st Century Fox.

In Apple’s case, the market seemed to focus on the firm’s return to sales growth in the holiday quarter. This, combined with positive rumors on a fully-redesigned iPhone 8 pushed the stock to all time highs, up 24%.

Samsung’s preferred shares appreciated 22% during the quarter, from $593 to $722. Investors have perhaps begun to appreciate the strength of Samsung’s current business, which posted an all time record 29.4T won of profit in 2016, up 11% from 2015 despite the negative effect of the Note 7 fiasco.

Fox’s business is also very strong, with operating profits hitting a fresh high of $1.9B in the fourth quarter, up about 10% compared to Q4 2015. The strength is broad-based, with all three major operating segments seeing profit increases of 6-20% on a trailing 12 month basis. On a more granular level, Fox News continued its domination of TV ratings, posting a 27% increase in Total Day viewers in Q1. Fox News has now spent 61 months atop the ratings rankings for cable news.

There were no material losers in the FV portfolio for the quarter, a result which we think is not particularly meaningful. Our goal is long term outperformance, and the randomness of markets will one day bring losing quarters for both individual positions and the portfolio as a whole, as they have done for some of our other strategies.

We are grateful for your business and your trust, and a special thank you to those who have referred friends and family. There is no greater compliment.

- Bireme Capital

¹ Net calculations assume a 1.75% management fee. Fee structures and returns vary between clients. FV inception was 6/6/2016.

Bireme Capital LLC is an SEC 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. The performance described above is the performance on a dollar weighted average of the securities in all Bireme accounts invested in the FV portfolio. Changes in investment strategies, contributions or withdrawals may cause the performance of your portfolio to differ materially from the performance displayed. 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. SPY ETF performance includes expenses as well as reinvested dividends. For current performance information, please contact us at (813) 603-2615.

Fundamental Value (FV) had an exceptional 2016, returning 16.8% before fees vs 7.5% for the SPDR S&P 500 ETF (SPY). The majority of FV’s return came in the fourth quarter, as it gained 10.1% vs a 4.0% return in the benchmark. This brings the portfolio’s outperformance, after typical fees, to 8.3% since inception.¹

We made three significant trades in the fourth quarter: selling Qualcomm, selling Viacom, and purchasing Time Warner.

Qualcomm was a big winner in the third quarter, appreciating 30%. Besides the change in price, another factor significantly changed our estimate of the prospective returns to Qualcomm investors: the announcement of the massive acquisition of automotive semiconductor specialist NXP. In our last quarterly letter, we noted that we were “in the process of evaluating what effect such an acquisition would have on our investment in Qualcomm.” We decided that the deal would dilute returns to QCOM investors and that it was time to take our profits and move on.

Unfortunately, it was not a positive price move, but poor business results that drove our divestment of Viacom, a media conglomerate that owns Nickelodeon, MTV, and Paramount Pictures. Although Viacom’s cable revenues have been declining for a few quarters, we had expected an eventual stabilization. Instead, the decline accelerated noticeably in the second and third quarters of this year. This fact, combined with our skepticism about the likelihood of a rumored deal with CBS, caused us to throw in the towel. Luckily, a rising market and our cheap purchase price of <8x earnings allowed us to exit the stock without incurring significant losses.

These two disposals were replaced in part by a new long position in Time Warner (TWX), the target of a merger deal with telecom giant AT&T. We purchased shares of TWX at about $88, a significant discount to the $106 AT&T was willing to pay, implying a ~20% annualized return if the deal closes next year. In an interesting twist, then-candidate Trump came out in opposition to the deal when it was announced in late October, likely contributing to the size of the spread. Trump even called out CNN (owned by TWX) by name, saying that the deal would “concentrate too much power in the hands of too few,” implying his administration would attempt to block the deal on antitrust grounds. However, we are confident that a Department of Justice led by Jeff Sessions, who publicly opposed Microsoft’s antitrust prosecution, will act similarly to previous Republican-led DoJs, sparing all but the most egregious mergers from antitrust enforcement. We also doubt Trump would oppose the transfer of CNN from a NY Democrat (TWX CEO Jeff Bewkes) to an Oklahoma-born Republican (AT&T CEO Randall Stephenson). Finally, we think that Time Warner’s assets have significant standalone value, providing some downside protection in the event that the deal does not go through and creating an  attractive risk/reward ratio.

We would also like to highlight one of our most successful investments of 2016: Samsung Electronics Preferred Shares. Despite its large size, Samsung trades at a valuation that indicates it is badly misunderstood. As both the largest manufacturer of memory chips AND one of the largest manufacturers of cell phones, it has a unique place in the electronics industry. In mobile phones, it is the only company with the quality and brand recognition to consistently compete with Apple at the high end of the North American and European cell phone market. But more importantly, Samsung’s massive scale in semiconductor manufacturing (40-50% share in both NAND and DRAM chips) means that it can remain profitable even through downturns in the industry.  The last two years in particular have borne this out, as Samsung’s memory division has maintained operating margins above 20% while its competitors have seen their margins crash.

Samsung’s shares deserve an earnings multiple consistent with its dominant industry position. But even after meaningful appreciation in 2016, Samsung’s common shares trade at 13 times earnings, a sharp discount from the roughly 20x PE of our benchmark, the S&P 500 Index. The preferred shares are even cheaper than the common, trading at a 20% discount despite equal economic ownership. Samsung Electronics Preferred Shares continue to be one of Bireme’s largest investments. If you are interested in learning more about why an investment in Samsung Electronics is so compelling, we encourage you to read Elliott Management’s detailed presentation on the company.

We are grateful for your business and your trust, and a special thank you to those who have referred friends and family. There is no greater compliment.

- Bireme Capital

¹ Net calculations assume a 1.75% management fee. Fee structures and returns vary between clients. FV inception was 6/6/2016.

Bireme Capital LLC is an SEC 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. The performance described above is the performance on a dollar weighted average of the securities in all Bireme accounts invested in the FV portfolio. Changes in investment strategies, contributions or withdrawals may cause the performance of your portfolio to differ materially from the performance displayed. 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. SPY ETF performance includes expenses as well as reinvested dividends. For current performance information, please contact us at (813) 603-2615.

FV outperformed the market in Q3, returning 5.4% before fees vs 3.8% for the SPDR S&P 500 ETF (SPY). This brings the portfolio’s outperformance, after typical fees, to 2.2% since inception.¹

FV made three new investments in the quarter. They were Humana, Express Scripts, and Twentieth Century Fox.

Humana is a health insurer focused on the Medicare market, providing a product called "Medicare Advantage.” Medicare Advantage is an insurance program through which the US government pays private insurers to provide Medicare-like insurance to individuals. Because of their leadership in this space, Humana was offered a buyout deal of $223 per share by Aetna, one of their main competitors. There is a lot of skepticism around this deal, as some investors feel the Department of Justice (DoJ) will successfully oppose the merger on antitrust grounds. We think the market’s focus on the deal has distracted people from the quality of Humana’s underlying Medicare Advantage business. Humana is a leader in highly-rated Medicare Advantage plans (see page 14 of the DoJ suit), and has dominant market share in many states. Their Medicare Advantage revenues have more than doubled from $16B in 2009 to $35B in 2015, and we think more growth is to come. We think Humana may produce a 10% IRR from current prices even if the merger does not close. Our average price was about $153 per share vs about $178 today.

Express Scripts is a healthcare company that manages pharmacy benefits for its customers. They are a middleman between customers (such as large employers and health insurers) and prescription drug manufacturers, and use their massive scale (roughly $100B of drug purchases per year) to negotiate lower prices for their clients.

Despite generating significant value for clients and cash for shareholders over time, we were able to buy the company at just over 10x earnings due to a contract dispute they are having with a large customer. We feel that the dispute is likely to be resolved more favorably than implied by the stock’s 20% decline this year. In the meantime, Express Scripts will continue to buy back more stock (on a percentage basis) than just about any company in the market. Our average price was about $76 per share vs a last price of about $70.

Twentieth Century Fox is a television and film conglomerate. Some of its most valuable businesses include the Fox Broadcast Network, Fox News, and Fox Sports Networks (which includes Regional Sports Networks like the YES channel as well as Fox Sports 1 & 2) as well as its namesake movie studio. Fox also has another group of assets that are somewhat obscure, but nonetheless quite valuable. For example, they own a satellite TV company in India that we estimate is worth more than $10 billion. They also own 39% of Sky TV, a publicly traded UK satellite TV company, worth about $8B at market prices. Finally, they own a 30% stake in Hulu which we estimate is worth another $3-5B.

If the company converted these assets to cash at the valuations mentioned above, the effective price for Twentieth Century Fox’s core US TV and film businesses would be a mere single-digit multiple of their underlying earnings. We feel this is far too cheap for some of the best media assets in the US. We bought the stock at a little less than $25 (where it still trades) and have made it a larger than average position.

One notable winner in the quarter was Qualcomm, which rose almost 30%. Qualcomm’s earnings release in July was a little better than expectations, and the business managed to break a multi-quarter streak of declining sales. Importantly, they made progress collecting patent royalty payments from certain Chinese smartphone companies that had previously been shirking them. On top of their positive earnings results, in late September rumors circulated that Qualcomm might use its cash pile to buy NPX, another semiconductor company focused on the automotive end market. On this “news” Qualcomm stock appreciated another 10+%. We have always thought Qualcomm should be able to find something productive to do with its $31 billion cash hoard, so are not necessarily surprised with the rumor. We are in the process of evaluating what effect such an acquisition would have on our investment in Qualcomm.

We are grateful for your business and your trust, and a special thank you to those who have referred friends and family. There is no greater compliment.

- Bireme Capital

¹ Net calculations assume a 1.75% management fee. Fee structures and returns vary between clients. FV inception was 6/6/2016.

Bireme Capital LLC is an SEC 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. The performance described above is the performance on a dollar weighted average of the securities in all Bireme accounts invested in the FV portfolio. Changes in investment strategies, contributions or withdrawals may cause the performance of your portfolio to differ materially from the performance displayed. 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. SPY ETF performance includes expenses as well as reinvested dividends. For current performance information, please contact us at (813) 603-2615.