Tourlite Capital Management Fourth Quarter 2022 Investor Letter

Tippapatt

To My Partners:

Tourlite Fund, LP Founder Class returned 3.4% for nan Fourth Quarter of 2022. The money has returned 5.0% since inception successful April 2022, compared to a -14.2% diminution for nan S&P 500.1,2 Below, we show greater item connected capacity contribution.

Gross Contribution & Year End Portfolio Exposures3

Performance Commentary

Our basal long/short equity portfolio performed highly good successful 2022. Our agelong portfolio declined -12.7%, outperforming a diminution of -14.2% for nan S&P 500 and -14.0% for nan Russell 2000. Our short portfolio returned 32.2%. This represents a important outperformance of 18% supra nan inverse S&P 500 and 18.2% for nan inverse Russell 2000. During nan 2nd and 3rd 4th of nan year, we allocated a greater information of our vulnerability to hedges, resulting successful a antagonistic resistance connected performance.

Relative Performance of Long & Short Portfolio [8]

Given our constricted nett vulnerability during nan year, we show nan capacity of nan HFRI Market Neutral Index.[9] While a adjacent benchmark for 2022, it whitethorn not beryllium nan champion comparison successful a emblematic twelvemonth if our nett vulnerability is accrued to our targeted 15-20% nett vulnerability range. The HFRI Equity Hedge Index[10][11] is simply a broader long/short beingness pinch a higher beta comparative to nan equities market.

Year-to-Date Gainers & Detractors

Special business investments had a antagonistic effect of -7.3% connected our gross performance. These investments included arena driven, arbitrage, activism, and different typical situations. In situations wherever we believed to person identified a difficult catalyst, nan money purchased equity options. In immoderate of these scenarios we believed nan consequence reward to beryllium up to 4:1. At nan clip of entering these positions, we had nan belief that nan marketplace was not correctly pricing successful nan imaginable scope of imaginable outcomes. In hindsight, location are immoderate of these positions we would not make again but we would for many, arsenic we judge we correctly analyzed nan disposable information.

When analyzing performance, we see our batting mean and slugging percentage. Batting mean is nan percent of positions wherever we generated alpha. Slugging percentage, a usability of position sizing, reflects nan magnitude of alpha generated erstwhile correct vs. alpha mislaid erstwhile incorrect. Ideally, if winners are sized larger than losers, your slugging percent is higher than batting average. For 2022, we had a higher batting mean than slugging percent owed to a fistful of ample typical business investments.

Much of these losses were owed to timing alternatively than having an incorrect thesis. Being early, particularly erstwhile utilizing derivatives, often results successful being wrong. As we look to amended our slugging percentage, we purpose to tighten our consequence guidance by reducing nan size of individual typical business positions. This will let america to withstand greater value variability while our theses play out.

A ample detractor successful our typical business portfolio was an arbitrage position during nan 3rd quarter. While location was nary timeline for nan worth of nan securities converge, we believed it to beryllium highly apt complete time. The evident consequence was nan chance nan dispersed would widen earlier converging. After accumulating a position, nan dispersed betwixt these securities widened, negatively impacting nan fund’s capacity for nan period of August. Though discussions pinch management, it became unclear erstwhile location would beryllium a catalyst to trim nan spread, and truthful we exited nan position astatine a loss. In nan pursuing months, a scheme was announced that would converge nan spread betwixt nan securities and nan dispersed meaningfully converged. Our correction was having a position excessively ample to withstand nan existent downside risk, moreover arsenic our original thesis played out.

Investment Strategy & Objectives

Our finance accuracy is derived from nan belief that a business’ semipermanent expertise to make rate travel is nan superior driver of value. We are focused connected purchasing precocious value businesses astatine charismatic valuations and purpose to return short positions successful companies pinch mediocre fundamentals trading supra adjacent value.

We look to seizure diversified sources of alpha from some agelong and short positions. Our long/short portfolio, built upon nan instauration of our basal investigation process, allows america to execute our stated objectives to thrust alpha and hedge risk. We attraction connected acquiring precocious value businesses trading astatine a important discount to adjacent value. These businesses see compounders, orphans, affirmative anticipation spread and typical situations. Our short portfolio uses a barbell attack to harvester accepted basal shorts (over earners, structural declines, forensic accounting, fallen angels) pinch much fierce shorts (frauds, fades).

Our nonsubjective is to execute supra market, risk-adjusted returns complete nan people of a rhythm by capturing nan dispersed betwixt our agelong and short portfolios. With a little relationship to nan marketplace and economical cycles, we judge this offers america elasticity pinch nan portfolio’s exposures and nan expertise to usage leverage.

Generally, nan portfolio’s exposures will autumn wrong nan pursuing parameters. Net vulnerability betwixt 0% - 50%, pinch a emblematic vulnerability person to 15% - 20%, and gross exposures betwixt 180% - 250%. We position nett vulnerability connected a beta adjusted basis. We see a blend of nan institution circumstantial opportunity group and macroeconomic factors successful determining our exposures. For example, a robust opportunity set, pinch an abundance of charismatic short positions, allows america to trim nan portfolio’s nett vulnerability and summation our gross vulnerability (leverage) to seizure nan expected dispersed successful early stock value performances.

Market Outlook

Many judge nan “health” of nan American user whitethorn limit nan effect of an economical contraction. We hesitate to judge these arguments arsenic nan effect of ostentation has impacted those crossed each income levels. 1 successful 4 workers making complete $200k per twelvemonth opportunity they unrecorded paycheck to paycheck. The number is importantly higher for nan mean American. According to a study by Lending Club, nan fig is complete 60%.[12] Savings rates are down, prices person soared, and now plus prices person retraced.

In our 3rd 4th letter, we discussed nan likelihood of a 4th fourth marketplace rally fixed bearish positioning and a imaginable displacement backmost to dovish reside driven by slowing inflation. The October CPI study connected November 10th of 7.7% YoY / 0.4% MoM, each 20bps beneath expectations, resulted successful nan S&P 500 spiking 5.5% and nan Nasdaq gaining 7.4%. This was an astir 4.5 modular deviation move for some indexes.[13] According to Bloomberg, $225 cardinal of short positions were covered complete nan two-day rally.

At nan extremity of nan year, we saw a continued sell-off successful sectors exposed to taxation nonaccomplishment trading (i.e. technology) and flows into cyclical names. The comparative outperformance of cyclicals successful nan 4th quarter, going into a imaginable recession, provides a ripe hunting crushed for opportunities. We spot galore cyclicals pinch highest net trading astatine mid-cycle multiples.

Entering 2023, we proceed to spot nan aforesaid downside consequence to net successful nan arena of economical contraction. We judge nan attraction is shifting distant from ostentation to economical conditions and earnings. To update our study from our anterior letters, nan S&P 500 returned -18% and nan NASDAQ Composite declined -33% successful 2022. Since nan opening of nan year, statement estimates for nan S&P 500 Ex-Energy person declined -10% for 2023 and -10% for 2024. Current statement estimates connote a year-over-year summation of ~13% for 2023 and ~11% for 2024.

Past Peak to Trough Declines[14]

While nan power of macroeconomic factors and facet exposures continued to consequence successful precocious relationship betwixt securities successful nan marketplace during nan 4th quarter, our study shows nan level of this relationship has begun to travel down successful segments of nan market. As nan macro taxable continues to displacement from ostentation to recession and net travel into greater focus, we judge location should beryllium greater dispersion among stock prices. This gets america excited for basal banal picking successful 2023.

Increase successful Daily Correlation (Q4 vs Q3) Among Top Constitutes[15],[16]

Portfolio Update

At nan extremity of nan quarter, our portfolio’s assemblage attraction represented: user (~40%), industrials (~40%), exertion (~10%), different (~10%).[17],[18] The Fund’s nett vulnerability continued to stay debased during nan 3rd quarter. Our gross vulnerability during nan 4th astatine ~160%, continued to stay little than our expected scope (180% - 250%). We scheme to proceed expanding our gross vulnerability arsenic nan opportunity group improves and correlations wrong factors proceed to decline.

Our agelong and short portfolios person different durations. The quality of holding agelong positions pinch a multi-year sky is nan imaginable for periodic periods of underperformance successful nan absence of a catalyst. This has been nan lawsuit for Perimeter Solutions, a important position successful nan money which knowledgeable an ~50% drawdown since we made our first investment. A successful short book helps alleviate nan detraction from wide money performance.

Portfolio Exposures[19][20]

Select New Positions

Long: APi Group (APG)

APi Group is simply a occurrence information business that inspects, maintains, and repairs occurrence information systems. The installation and attraction of these systems are non-discretionary and are regulated by law. APi’s acquisition of Chubb’s occurrence and information business from Carrier Group provides further standard pinch its ample European footprint. There is simply a important opportunity for separator description arsenic guidance is focused connected improving Chubb’s margins to APi’s levels.

We judge institution guidance to beryllium conservative. The marketplace and sell-side analysts are underestimating nan existent normalized net powerfulness of APi’s business. We judge nan marketplace is excessively focused connected nan Company’s indebtedness load (3.5x EBITDA) which will beryllium continued to beryllium paid down complete clip to management’s target of nether 2.5x.

With a double-digit 2023 free rate travel output and azygous digit EBITDA multiple, we judge this business trades astatine a important discount to adjacent value. On a comparative basis, backstage marketplace transactions person seen valuations astir 20x EBITDA. We judge a mediate crushed is reasonable.

Long: Undisclosed Technology Spin-off

During nan 4th fourth we began to acquisition shares of a caller spin-off which we judge has important upside. New guidance has laid retired a elaborate scheme to move astir nan business and execute optimal levels of profitability. The business offers a comparatively sticky merchandise pinch debased turnover and precocious switching costs. We judge normalized net powerfulness from a successful turnaround reflects a existent P/E of 3x.

Long: Provention Bio (PRVB)

We accumulated a mini position successful Provention arsenic a consequence of its upcoming FDA support notification. We believed nan stock value was not factoring accusation disposable successful nan market. We published our findings successful a statement connected our website, tourlitecapital.com, and Twitter.

As we expected, connected November 17th, Provention announced nan support for its Teplizumab drug.

We support a position successful Provention and judge nan Company is simply a apt acquisition target.

New Short: Undisclosed Short

This is 1 of our highest condemnation short positions. The Company is simply a misunderstood, profitless, Covid beneficiary which claims to beryllium revolutionizing its industry. Based connected our research, we judge it to beryllium a flawed business model, improbable to execute nan level of profitability nan marketplace is presently assuming.

On a per customer basis, nan Company’s valuation is 5-10x much costly than peers. While Wall Street continues to worth this business connected a gross multiple, we judge this to beryllium inappropriate arsenic nan Company uses a different gross nickname methodology than peers. Current guidance and Wall Street estimates are excessively precocious and presume unrealistic projections based connected inflated levels of profitability. Most misleading to investors is nan position of nan Company’s cardinal gross profit metric which we judge to beryllium overstated by astir 3x.

Update connected Select Positions

Long: Perimeter Solutions (PRM)

Perimeter is nan sole qualified supplier of aerial occurrence retardant for galore applications. This ngo captious merchandise represents a mini information of its customers’ spend, and gross is recurring successful quality arsenic semipermanent secular tailwinds (growth successful number and size of fires) support growth. Perimeter is led by what we see to beryllium an experienced, best-in-class, superior allocation focused guidance team.

Perimeter checks our boxes for an investment. It is simply a marketplace leader successful a increasing market, beardown rate travel procreation and return connected capital, talented guidance team, trading astatine an charismatic valuation.

On December 12th, Morgan Stanley published a statement from management’s roadworthy show:

“PRM's awesome competitory moat successful its halfway marketplace remains its top worth proposition — and nan top investor debate… Near term, it seems apt that Fortress (the imaginable entrant) will scope afloat qualification for usage by nan US Forest Service successful 2023. However, this will apt transportation much header than applicable risk. The existent constituent of contention is whether it is logistically businesslike for firefighting agencies to usage multiple, non-compatible fire-retardant solutions.”

Perimeter’s shares sold disconnected complete 10%. We work together that nan consequence is much successful nan header than consequence to nan underlying business and marketplace share.

We judge location are a fewer reasons nan banal continues to waste and acquisition wherever it does today:

1. Concern complete nan support of a imaginable competitor's merchandise for aerial use

The consequence of a competitor taking marketplace stock is unlikely. Perimeter is presently nan only supplier pinch USDA approval. While it is apt Fortress will beryllium approved successful nan near-term, Perimeter’s infrastructure and integration into nan proviso concatenation provides a lasting competitory advantage to thief support marketplace share. This, mixed pinch nan truth that Perimeter’s merchandise represents only ~3% of customers suppression spend, makes it challenging and improbable for Federal and State agencies to move providers.

2. Variability successful net arsenic a consequence of variety successful occurrence season

We understand occurrence seasons are not perfectly linear but nan wide inclination successful acres burned continues to support portion growth. We judge location was immoderate misunderstanding of nan occurrence suppression marketplace this year. This year’s occurrence play had a ample number of acres burned successful Alaska. Since occurrence retardants are not often utilized successful distant locations wherever nan occurrence is not a threat to humans aliases infrastructure, this did not supply support to Perimeters volumes.

3. Some investors are turned distant by unsocial compensation structure

In our view, if it’s a intelligibly defined scheme and you tin exemplary it out, you tin relationship for it going forward. We for illustration a guidance squad that is paid to execute and has tegument successful nan game.

Revenue should beryllium capable to compound astir 10% from a operation of accrued volumes and mid-single digit value increases. Volume maturation will beryllium fueled by continued increases successful acres burned, larger fires, and further stretched retired occurrence seasons. Outside of its North American Fire business, further maturation should travel from underpenetrated world markets and nan Specialty Products segment. International is presently astir 20% of revenues and gaining traction. The 2nd limb of Perimeter, which gets little attraction and represents 1/3rd of revenues, is Specialty Products which, arsenic of nan 3rd quarter, has grown year-over-year revenues 40% and has much than doubled EBITDA.

Based connected our 2023 projections, astatine nan existent stock value of astir $9, Perimeter is trading astir a 6% free rate travel yield. That is for a business pinch sizeable competitory advantages that should turn free rate travel per stock by complete 25% per twelvemonth for nan adjacent 2 years astatine least. This is simply a business mostly uncorrelated to economical cycles and we judge location is constricted downside to normalized earnings. We spot a way to adjacent $1 per stock of free rate travel by 2025.

Long: Verra Mobility (VRRM)

Verra Mobility is simply a leader successful proscription exertion and operates successful 3 segments: commercial, authorities and parking. The commercialized and authorities segments correspond 85%+ of revenues. Verra is an charismatic business pinch mid-to-high azygous digit gross maturation and sustainable competitory advantages.

Commercial services supply tolling services and usurpation guidance for commercialized fleets (i.e., rental cars). Verra is integrated pinch tolling authorities and has a gross divided pinch rental car operators. The business should use from 2 cardinal tailwinds including nan continued displacement from rate to cashless tolls and conversion of highways to toll roads. Currently ~65% of toll booths are cashless and that is expected to turn to complete 80% complete nan adjacent fewer years. Verra is highly integrated into nan rental car strategy pinch semipermanent contracts and exertion that would beryllium costly to replicate. The marketplace statement is Verra’s rental car business has recession consequence arsenic it is tied to recreation demand. In addition, location is commentary that ridesharing and autonomous driving is simply a consequence to terminal value. We position maturation of ridesharing and autonomous driving arsenic a affirmative semipermanent catalyst for nan fleet guidance business.

The Government conception offers solutions to cities and schoolhouse districts including red-light, velocity and autobus lane camera enforcement. Most of these relationships are gross shares and Verra maintains ownership of nan hardware/cameras. Future maturation will travel from expanding offerings to states pinch constricted existent enforcement (i.e., only person reddish ray cameras) and breaking into nan 17 states pinch nary photograph enforcement. While NYC is nan crown jewel, and take successful California, Florida and Connecticut would importantly move nan needle, nan value of fragmented relationships pinch smaller cities and municipalities is underappreciated. In a recession, authorities revenues should beryllium durable on pinch astir of Parking. Most authorities relationships are gross shares and Verra maintains ownership of nan hardware/cameras.

On November 2nd, Verra stock value had a antagonistic guidance to its 3rd 4th earnings, falling complete 15%. We judge location were precocious expectations arsenic a consequence of its beardown 2nd quarter, particularly for nan Commercial business. We identified 3 reasons for nan beardown 2nd 4th and weaker than expected 3rd quarter:

• A ample magnitude of recreation request was pulled up to nan 2nd quarter, TSA Passenger

Volumes grew 26% from nan first to 2nd 4th and grew only 1% successful nan 3rd quarter.[21]

• Hurricane Ian had an effect astatine nan extremity of nan 4th and opening of nan 4th fourth arsenic Florida did not complaint tolls for 18 days.
• Rental car buying successful nan 2nd 4th typically results successful a beardown title registration business. The 2nd 4th of 2022 was exceptionally beardown arsenic rental car companies bought much aggressively than normal. This resulted successful a $3.5 cardinal Q-o-Q decline, erstwhile this typically represents a $1 cardinal headwind.

TSA information remained beardown successful nan 4th quarter, up ~14% year-over-year but an ~3% diminution from nan 3rd quarter. Based connected our projections for 2023, Verra trades astatine complete a 7.5% free rate travel yield.

Exited Short: Ranpak Holdings (PACK)

From our fund’s inception successful April 2022 to nan extremity of July, we were short Ranpak Holdings. We nary longer person a position. The position was 1 of our top contributors to capacity during

2022. In our Second Quarter missive we highlighted this “Industrial Short” arsenic “an business packaging business that has knowledgeable important tailwinds from maturation of e-commerce.” We would for illustration to item Ranpak arsenic an illustration of a anterior short position.

Ranpak is simply a 2019 vintage SPAC that manufactures machines and insubstantial products and sells them though a razor/razor leaf model. Think of nan insubstantial filler successful your Amazon packages. Ranpak would supply customers its machines for free aliases a mini costs and waste those customers its insubstantial products. In April 2022, nan Company had an ~$1.6 cardinal marketplace capitalization.

There were signals of marketplace stock declining arsenic maturation trailed e-commerce. Increased title from competitors entering insubstantial products (i.e., Sealed Air, SEE) and innovations specified arsenic right-sized-packaging. We judge guidance lacked assurance owed to an summation successful insider selling.

Consensus saw continued e-commerce tailwinds and partnerships pinch companies including Amazon would substance 10%+ integrated growth. In addition, Ranpak’s insubstantial products connection an advantage pinch ESG conscious customers compared to integrative bubble wrap alternative.

We expected maturation to normalize backmost to mid-single digits arsenic covid e-commerce tailwinds lapped and transmission checks showed declining income pinch Amazon, its largest customer. Rising inventory levels and declining margins contempt nan maturation of e-commerce confirmed this thesis. On nan ESG front, our master calls uncovered shifts to “right-sized” packaging arsenic nan astir ESG friends solution.

Ranpak traded astatine complete 25x highest EBITDA, costly connected an absolute ground and much than 2x its closest, much diversified competitor Sealed Air. Ranpak’s GAAP adjacent group starring EBITDA separator of 31% was misleading owed to capitalizing of instrumentality costs. This resulted successful an ~10% benefits to reported EBITDA. Shortly aft going public, nan Company raised money astatine $5 per share, earlier seeing their stock value apical retired supra $40. We exited our position astir ~$5 per share.

Hidden Value Stocks Interview

In December, I was interviewed by Hidden Value Stocks, a spin-off newsletter from ValueWalk. I was nan first long/short money featured. We discussed Tourlite’s finance strategy and a fewer of our holdings. A transcript tin beryllium recovered connected nan documents conception of our website.

This puts an extremity to our rookie year. In Ty Cobb’s 1905 rookie campaign, his .238 mean sat adjacent nan mediate of nan battalion successful master baseball. The Hall of Famer’s profession .366 mean remains baseball’s all-time record. Like Cobb, we consciousness our first twelvemonth was a learning year, and we delivered coagulated results comparative to peers successful a challenging marketplace environment.

Thank you for your spot and support. Please consciousness free to scope retired to maine pinch immoderate questions.

Sincerely,

Jeffrey G. Cherkin

Originally Posted connected Reddit.com

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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.

Select quarterly money letters.