TMR Capital commentary for the first quarter ended March 31, 2025.
Performance
Markets have experienced the highest volatility since Covid. In times of crises, correlations go to 1:
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While most investment funds de-grossed, dampened their net exposure, and “upgraded” their long book to include super high quality, predictable, low beta names with no negative tariff exposure, we have leaned into the volatility, buying dislocated names most negatively affected by the tariff announcements (we have since exited some at large profits).
The biggest losers in this bear market have been former AI darlings and “obvious” tariff losers such as many retailers and certain semis. We re-entered AI favorites such as CLS and MU, and bought “obvious” tariff losers such as RH and a small position in W. Many of these stocks declined 50-75% from their highs earlier in 2025. We averaged down in late February, March, and part of April.
While this hurt our performance in February and March, we are now up 5.7% ytd while the Russell 2000 is still down 9%. Furthermore, several of our longs could still double from todays prices if we get positive news on the tariff situation – and even then they would still be flat ytd.
To be clear, since the beginning of the year, we have viewed the overall market in the US as unattractive. In our previous letter, we showed a chart by JP Morgan that illustrated that every time the S&P 500 forward P/E multiple got to c.23x, the returns over the next decade have been flat to negative. So why own any stocks if we believe the US stock market indexes have a decent chance of being flat for the next decade? Because we own a concentrated portfolio of undervalued securities with attractive idiosyncratic stories. The market was flat from 2000-2010, yet several long only and long/short funds produced strong returns.
While we have views on the macro, we make investment decisions based on bottoms-up fundamental analysis. Our net exposure continues to remain dynamic, as it has since inception of the fund.
Portfolio Position Update
Long Restoration Hardware (RH)
Stock went from 451 earlier this year to a low of 145 and now back to 205 from tariff/consumer discretionary spend concerns despite business re-accelerating from the largest product refresh in the company's history.
RH is a leading retail and luxury lifestyle brand operating primarily in the home furnishings market. Furniture accounts for over 65% of its revenue. They have more than 80 retail (galleries) and over 40 outlet (damaged/returned products) stores.
RH benefits from scale advantages and intangible assets as the market leader in the high-end luxury home furnishing industry.
The stock has compounded at a 18% CAGR since it went public in 2012. This can be attributed to RH’s brand and premium position in the industry, as well as Garry’s bold capital allocation decisions.
RH has aggressively re-invested its FCF into opening new stores, improving stores, and sales & marketing. Occasionally, when the stock became depressed, RH has executed unusually large and rapid share buybacks. RH repurchased 50% of its shares in two months in 2017. More recently, RH repurchased 1/3 of its shares from 2022-2023.
RH is experiencing the "worst housing market in 30 years" in terms of home furnishing. They have continued to invest aggressively and currently going through their largest product transformation in their history, which is driving their recent growth and market share gains. Their transformation includes:
- A massive 80% refresh of their product lineup, the largest in the company's history. This is substantially more than their typical 15-20% refresh rate.
- Introduction of new collections and brand extensions.
The company plans to fully transition their product lineup over a 12-month period, with multiple "contacts" (product releases) scheduled throughout 2025.
And much more as part of the transformation.
The transformation has already led to growth acceleration and market share gains in the recent quarter.
As the industry recovers, and RH's own initiatives take fold, revenue should grow 15-20% over the next 2-3 years while EPS grows 50%+ each year for the next 2-3 years. We think this is a multi-bagger at current prices.
