April 16, 2024
To Our Clients:
We had another period of very strong results in Q1 2024. For the period (Q1 2024) our separate account composite was up approximately 14.5% (net of fees), ahead of the S&P 500’s robust return of 10.6%. This was accomplished with a portfolio that we feel is still undervalued (though not as undervalued as it was) and possessing strong long-term growth potential.
Our results for the separate account composite since the start of GoodHaven 2.0 (12/31/19) through 03/31/24 are a cumulative increase (net of fees) of 93.8% versus the S&P 500’s increase of 74.2%. While we wonder if there is a perfect “category” for our unique portfolio we note that, according to Morningstar, our public fund, managed alongside your account, ranked (at 03/31/24) in the top 2%, 1% and 3% of our category for the trailing one, three, and five-year periods respectively.
We take this moment of recent strong results to remind you that your portfolio is managed striving for long[1]term outperformance. We will underperform the market averages from time to time. Also, despite our best efforts and alignment as material fellow clients, we will make an occasional unsuccessful investment. Having said that, we are pleased (but never satisfied) with our recent results.
The broad stock markets of the last few years have surprised many. As The Economist wrote (3/11/24):
“Two years ago, pretty much everyone agreed that one of the great bubbles was bursting. An era of rock-bottom interest rates was coming to a close, shaking the foundations of just about every asset class. Share prices were plunging, government bonds were being hammered, crypto markets were in freefall. Wall Street’s prophets of doom were crowing with delight. The consensus of the previous decade—that inflation was dead and cheap money here to stay—looked as ludicrous as the groupthink of any previous financial mania. Thus the pendulum was about to swing: from exuberance to skepticism, risk-taking to cash-hoarding and greed to fear. It would take a long time to swing back. Or not. The trough in American stocks came in October 2022. Less than 18 months later stock markets around the world are back at all-time highs (see chart 1). America’s in particular is on an eye-popping run, with the S&P 500 index of large firms having risen in 16 of the past 19 weeks. The value of Nvidia, a maker of microprocessors essential for artificial intelligence (AI), has risen by more than $1trn in the space of a few months. Bitcoin hit another record on March 14th. Disorientingly for those who blamed the previous mania on near-zero interest rates, this comes after a brutal campaign by central bankers to yank them back to more normal levels (see chart 2). Once again, every conversation about markets veers unerringly back to the same question: is this a bubble?”
We don’t look back at this and think we knew better – we didn’t. We look back and are reminded how hard it is to make such market predictions.
That doesn’t mean there are not real macro things to worry about -there always are. As the CBO (Congressional Budget Office) said “fiscal burden on unprecedented path.”
We remain mindful of these and other real risks but will continue turning over rocks in search of opportunities for us all. Our focus is always on what is both important and knowable – leading us to deeply research the companies we own (or might own), invest with a margin of safety and use market volatility to our advantage and think long-term. Over time the economy and markets march forward. By the way, the truly troublesome macro events usually arrive unannounced and from surprising places.
Amidst the market backdrop of many new, exciting but often hard to predict companies and industries garnering headlines we outperformed in the period with returns led by a buildings products supply company in Texas, a conglomerate in Nebraska, an auto insurance (primarily) company in Ohio, and a company operating mostly in and around the home heating oil sector in Alberta, Canada. I’m referring to Builders FirstSource, Berkshire Hathaway, Progressive Corporation, and TerraVest Industries.
We like new, we like technology, and we have owned and continue to own things that fit into or touch those areas too. However, we strive to invest in companies where we feel strongly about our ability to roughly predict what our companies and their industries will look like in five or ten years. As we have said before – this has gotten more difficult -such is the competitive and dynamic nature of capitalism. This makes us more discerning when hunting for new things and slower to part with existing things that “fit the bill.”
We had only one small decliner in the period – Camden Property Trust – where our long-term outlook remains solid. We made no material new purchases, however, we reduced our successful holding in Academy Sports.
The economic results at our companies have lately ranged from good to excellent. As it relates to our holdings operating in/around the domestic housing market, we remind you again what we said last quarter:
“We remind you that the housing market is still cyclical – and while both Builders and Lennar are much better businesses than they used to be with solid balance sheets and low leverage, periodic business volatility comes with the territory here.”
Progressive (PGR) has (deservedly) been a strong performer as of late and it’s worth remembering the differentiated view we had a few years ago that provided this opportunity. Morgan Stanley opined in a September 24, 2021 research report with PGR priced at $91 – “Rate Relief Not in the Cards. More Regulatory Pushback” – Underweight. We felt CEO Tricia Griffith and team would over time be able to get the rates they needed to return to underwriting more profitably while growing and boy has that been the case lately. Year to date, the combined ratio is 86 while PIF (policies in force) are up 7% YOY.
At TerraVest the extraordinary has become commonplace. Since we wrote to you last, TerraVest reported strong earnings and just weeks ago announced another “typical TerraVest” acquisition. TerraVest entered into an agreement to acquire Advance Engineered Products based in Regina, Saskatchewan.7 Advance is a leading Canadian manufacturer and service provider in the tank trailer industry in Canada. We think they paid about 3x EBITDA for Advance. Despite a stock price that’s up about 60% YTD the shares still trade at only about 14x our 2024 free cash flow estimates.
To reiterate some process thoughts that we believe have been important to the recent results at GoodHaven 2.0, we reprint some comments we made in January 2020 in our first letter to you after our reorganization:
“Further and even with extensive experience, a review of our past process leaves me reminded that: 1) growing high return companies are special; 2) without a catalyst, intrinsic value better be rising as you sleep; 3) there is no shame in jumping over lower hurdles; and 4) it’s not an IQ test – decision making, insights and position sizing are critical aspects of performance. Of course, material realized losses are just unacceptable.”
I thank all fellow clients for their confidence as GoodHaven 2.0 continues to unfold.
Stay healthy and safe,
Larry
