Bireme Capital Q4 2022 Quarterly Report

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Fundamental Value had 1 of its champion quarters to date, returning 34.7% nett of fees vs 7.6% for nan S&P 500. The strategy has now compounded astatine 27.4% annualized, besting nan marketplace by astir 16% a year. While it will beryllium almost intolerable to support this level of absolute aliases comparative performance, we are still very optimistic astir nan creation of nan portfolio comparative to nan scale today.1

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Market commentary

When nan twelvemonth 2022 began, we had conscionable vanished our “Everything Bubble” series, and nan way up seemed remarkably clear to us. In that series, we wrote:

Extreme valuations presage existent returns that investors will find severely disappointing -- and apt antagonistic -- for galore plus classes complete years to come…We judge ostentation is apt to beryllium nan catalyst that yet pops nan everything bubble. If we are correct, yet nan Fed will person to reverse course, tightening argumentation and raising liking rates. When this happens, investors who person speculated successful debased aliases no-yielding assets for illustration SPACs, high-flying maturation stocks, and NFTs whitethorn find their portfolios permanently impaired…The barbell marketplace presents tremendous opportunities for discerning progressive managers connected some nan agelong broadside and nan short side. We person ne'er been truthful enamored pinch nan disposable opportunity set.

Those predictions person mostly travel true, and we person appropriately capitalized connected them, pinch Fundamental Value outperforming nan S&P by 54% successful 2022.The way guardant coming is little clear. Inflation, though still uncomfortably high, is moderating arsenic we expected. However, ostentation “moderating” from a header ~8% should beryllium acold comfort. We deliberation nan astir apt result is that it settles good supra nan Fed’s 2% target -- say, 5%, astir nan existent champion estimate for costs maturation and persistent components of nan CPI -- necessitating years of painfully precocious liking rates. But nan CPI could besides plunge into vulnerable deflationary territory; nan steep way of complaint increases and quantitative tightening aft a astir uninterrupted decade of ZIRP could daze nan system to a standstill.Or, of course, ostentation could autumn quickly to 2% by nan extremity of 2023 and enactment location indefinitely. It’s possible, but fanciful. Yet economists and traders progressively look to expect that astir benign of imaginable outcomes.This Goldilocks position for nan system permeates nan equity market. Valuations stay stubbornly high, and analysts proceed to estimate net maturation for early years contempt nan likelihood that margins will autumn from grounds levels owed to rising labour costs, rising liking payments, withdrawal of pandemic-era fiscal stimulus, and a slowing economy.Since we published Part III: Apex of a Bubble connected September 21st 2021, we’ve seen nan largest simplification successful fiscal stimulus connected record, nan fastest spike successful existent yields, nan worst yearly capacity for Treasuries, nan fastest gait of monetary tightening successful generations, and nan reversal of a decade of quantitative easing and zero liking rates.Astonishingly, nan S&P is down less than 7% since that day.What level should nan S&P 500 waste and acquisition astatine today? There’s nary correct reply to that question. But it is clear that nan risks stay highly asymmetric to nan downside.The equity consequence premium present is perilously thin. As an illustration, see XLP, nan S&P 500 Consumer Staples ETF, which comprises solid, if ponderous, companies that 1 hopes will bask GDP+ growth. As of this writing, XLP trades astatine 24x earnings, an net output of 4.2% -- precisely nan output of a riskless 2-year US Treasury.Complacency reins. And this is complicating nan Fed’s effort to tighten financial conditions, arsenic nan Fed is each excessively aware:

Participants noted that, because monetary argumentation worked importantly done financial markets, an unwarranted easing successful financial conditions, particularly if driven by a misperception by nan nationalist of nan Committee's guidance function, would complicate nan Committee's effort to reconstruct value stability.

The Fed will request to push back. We wrote last quarter:

The Fed put is now a Fed call: alternatively than a limit to really overmuch investors tin lose, location is simply a limit to really overmuch they tin make. We be aware investors that nan Pavlovian consequence to bargain nan dip will not needfully lead to nan aforesaid rewards arsenic it has successful nan past… A much due maxim for nan foreseeable early mightiness beryllium “sell nan rally” alternatively of “buy nan dip.”

Investors who truthful eagerly repeated "Don't conflict nan Fed" to rationalize nan decade-long bull marketplace look to person forgotten that mantra now. Hope springs eternal. Despite our fears that nan equity marketplace arsenic a full is priced for asymmetric downside, we proceed to find immoderate exceptions that are priced for asymmetric upside, specified arsenic META, a transcendent institution successful a secular maturation manufacture trading for a single-digit aggregate of normalized net (full thesis here). While we are progressively constructive connected our agelong book, we stay conservatively positioned astatine a astir 80% nett long, retaining important barren powder to aggressively summation our holdings connected marketplace weakness. Our short book is smaller than it was astatine nan highest of nan madness a twelvemonth ago, but galore securities proceed to waste and acquisition astatine transparently irrational prices. We expect our shorts to proceed to make not conscionable alpha, but affirmative absolute returns.It’s a awesome clip to beryllium an progressive worth investor. We wrote successful our 1Q22 letter:

The past decade has rewarded valuation-agnostic and meme-chasing investors, culminating successful nan unhinged maturation banal mania that defined 2021. We deliberation nan adjacent era will beryllium marked by a return to sanity, rewarding disciplined, discerning and value-conscious investors -- and we deliberation that era has conscionable begun.

It’s not excessively precocious to subordinate america astatine Bireme. Please scope out.

Portfolio commentary

RCI Hospitality (RICK) appreciated much than 40% successful Q4, rising from $65 to $93. The institution reported robust results connected December 14th, pinch fiscal twelvemonth EBITDA up 44% to $87m and EPS of almost $5 per share. The institution besides announced nan acquisition of six nightclubs and a fewer one-off barroom / edifice locations. The nightclubs were acquired astatine astir 5x EBITDA, a value made moreover cheaper by a seller-financed 7% loan. This is an highly charismatic costs of indebtedness fixed that AAA bonds were yielding complete 5% successful November. The acquisition appears apt to summation RICK’s FCF by 15-20% and only required nan issuance of 200k shares (around 2% of nan afloat diluted total).Netflix (NFLX) appreciated 25% successful nan quarter, good disconnected its lows but still down much than 50% connected nan year. Q3 results saw a return to subscriber growth, pinch nan patient adding 2.4m and finishing astatine an each clip precocious 223m subscribers. Netflix besides debuted its much-anticipated advertizing tier successful November, pricing it astatine a 30% discount successful nan US. While it is still very early days, we deliberation by 2028 Netflix’s ad-supported tier will person tens of millions of subscribers and make $10+ cardinal successful gross astatine precocious margins. We expect net to transcend $30 per stock by then, astir triple what nan institution earns today.Bolloré (OTCPK:BOIVF) banal was up 10% successful nan last 4th of nan year. Q3 results saw income successful nan proscription conception up 25% year-over-year, arsenic nan firm’s larboard terminals and freight forwarding businesses proceed to retrieve from nan pandemic. The institution besides disclosed that L’Odet, nan holding institution which controls nan mostly of Bolloré voting shares, purchased 103m Bolloré shares done Q3 for EUR 485m. We position this arsenic a clear ballot of assurance successful Bolloré’s valuation and fundamentally a stock buyback owed nan information quality of nan ownership. Despite nan Q3 rise, Bolloré shares proceed to waste and acquisition astatine a ample discount to nan worth of its assets, which see a $7b liking successful Universal Music, nan $5.1b waste of its African assets (which closed connected 12/21/22), its $3b liking successful Vivendi, and nan remaining freight forwarding business which will apt make astir 7b EUR of revenues successful 2022. The full marketplace capitalization of Bolloré aft decently accounting for treasury shares is conscionable $7.3b.The Twitter woody closed conscionable earlier Halloween arsenic we mentioned successful our Q2 letter, giving power of nan societal media level to nan 1 of nan world’s richest men and providing a adjacent 50% return connected finance to Bireme clients. Musk intelligibly knew what was coming successful nan Delaware Court of Chancery and decided to fold his hand.Many of nan companies successful our short book continued to (OSTK) was down 21% successful Q4, arsenic investors person yet realized that nan company’s bitcoin-trading pivot was a farce and they are near pinch a COVID-era “winner” that faces awesome headwinds arsenic nan pandemic subsides. Current Street estimates foretell a -28% income diminution for 2022, EBITDA margins of conscionable 3%, and fundamentally zero nett profit. Arguably Overstock’s largest plus is nan rate connected its equilibrium sheet, alternatively than its marginally profitable, zero-growth namesake eCommerce site.Nikola (NKLA), nan “manufacturer” of alternative-energy vehicles, was down 31% successful Q4 to caller all-time lows. Contrary to 2021, nan institution did book revenues this year. They sold a fewer 100 trucks. However nan institution grounded to make moreover a gross profit, losing $59m earlier considering costs for illustration marketing, G&A, and depreciation. Nikola has burned astir $500m of rate this twelvemonth but guidance prudently (albeit partially) financed this by trading complete $100m of recently issued banal into nan unfastened market. But moreover pinch nan banal down 75% from its de-SPAC value we deliberation these caller investors whitethorn ne'er spot a affirmative return.Tesla (TSLA) shares were down 48% successful nan quarter, arsenic Musk was forced to waste shares to finance his different adventures and investors seemed to mobility nan strategy of moving 4 firms astatine once. Admittedly, Tesla is still increasing furiously, pinch revenues up 55% successful Q3 complete past twelvemonth and EBITDA margins a patient 23%. But we proceed to mobility whether that level of separator is sustainable complete nan agelong term, arsenic nan title successful EVs heats up and Tesla continues moving retired of luxury value points to meet their measurement goals.Tesla’s hyper maturation shape whitethorn besides beryllium ending. Wait times for Tesla’s cars are conscionable a fewer days now, down from aggregate months past year. That is simply a bad motion for maturation astatine nan $350b marketplace headdress automaker.Even nan meme stocks AMC and GME declined much than 20% successful nan 4th aft antecedently sidestepping nan 2022 carnivore market. AMC’s Q3 operating results demonstrated their ongoing problems successful a post-COVID world, pinch a nett nonaccomplishment of $226m for nan 4th and $686m connected a twelvemonth to day basis. The institution has burned much than $700m of rate truthful acold successful 2022, partially financing this pinch agelong word indebtedness yielding a whopping 15% to maturity.At nan existent AMC stock value astir $4, nan afloat diluted marketplace headdress of nan institution — including nan “AMC Preferred Equity” shares (whose ticker is, of course, "APE") — is astir $6b. This is contempt nan truth that nan patient has $4.7b of nett indebtedness outstanding and generated little than $300m of EBIT moreover successful pre-COVID times. We deliberation it is clear that immoderate type of restructuring will hap astatine AMC successful nan adjacent fewer years. We pressed our short stake during nan 4th by expanding our short position successful AMC and buying a corresponding number of APE shares, which, contempt being economically equivalent, waste and acquisition astatine a monolithic discount for nary reason. We were truthful pleased to spot guidance denote a ballot to person APE shares into AMC shares. Though nan discrepancy persists, this has reduced nan discount betwixt nan 2 securities and created a insubstantial profit for our clients.

We are grateful for your business and your trust, and a typical convey you to those who person referred friends and family. There is nary greater compliment.- Bireme Capital


1 Net calculations presume a 1.75% guidance fee. Fee structures and returns alteration betwixt clients. FV inception was 6/6/2016.

The capacity successful nan charts is nan capacity of nan securities successful each Bireme accounts ("Bireme Master Account") and nan strategies that dress up nan relationship holdings from inception done 12/31/2022. The capacity successful nan tables is nan capacity from inception and from 10/1/2022 done 12/31/2022. Past capacity is not suggestive of early results. It is not imaginable to put straight successful an index. Index capacity does not bespeak charges and expenses and is not based connected existent advisory customer assets. Index capacity does see nan reinvestment of dividends and different distributions. The capacity successful nan Bireme Master Account is shown arsenic nett of 1.75% advisory fees. Some clients whitethorn person services astatine a little advisory interest pinch a capacity interest based connected nan gains successful nan account. Returns are shown nett of fees astatine nan relationship level, and gross of fees astatine nan individual strategy level. For existent capacity information, please interaction america astatine (813) 603-2615.Sources: Bloomberg Finance LP, Interactive Brokers LLC, S&P Compustat, Bireme Capital LLC.

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Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

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