Hedge Fund Alpha, through its section Hidden Value Stocks, aims to identify undervalued and often avoided stocks that some investors grasped the courage to pursue. In the Q2 2018 edition of HVS, we interviewed Noland Langford, the founder and CEO of Left Brain Capital.
Three cornerstones of the company’s strategy are freedom, flexibility, and intelligence. Companies they invest in are not bordered by a specific market cap, sector, or asset class, granting flexibility and freedom to make moves in a variety of markets.
When creating a portfolio, Left Brain Capital opts for high-concentration and high-conviction investments, preferring long-investment-horizon deals. When we take all this into account, the company has ample freedom to pursue their strategy for the highest gains possible. To identify the best options, they combine fundamental, technical, and quantitative analysis.
In 2017 they were one of the top-performing hedge funds by Preqin and were shortlisted in the Best Newcomer category in the US Hedge Fund Performance Awards. In 2018 we discussed one of their high-conviction positions—Trade Desk Inc (NASDAQ:TTD)—and went in depth with its investment thesis.
The Story of Left Brain’s Early Success
Left Brain, since inception, had the goal to achieve 17% of annual gains. While it may seem to be a complex milestone, the company managed to deliver it in the first two years. One of the key reasons for this success is the already mentioned flexibility, which allowed the company to move where the highest gains were.
In the process of developing a strategy, there was a lot of pondering. The fund’s executives didn’t want to trap themselves in the specific market, and they saw more reason to focus on targeted returns. To make this happen, they evaluate all the companies for their long-term return potential.
The goal of 17% seemed right since it would return $5 million to every $1 million to investors over the course of 10 years. That number sticks well since it is easy to remember, and with the use of the right strategy, it is reachable. In fact, just in the first year, the company delivered 137% gains, which is nothing short of extraordinary.
The fund was incepted in early 2016, which was a really bad time to start anything. At the time, oil fell below $30, and there was a lot of distress in the high-yield bond market. They chose to invest in companies that were financially sound but with an opportunity to acquire their bonds at 60 to 70 cents on the dollar.
Interest payments were still made on time, resulting in a yield-to-maturity rate between 18% and 20%. An opportunity like this rarely happens, so the fund went hard into it. By the end of 2016, the fund was rewarded when the market normalized with prices going back to their normal levels.
Their risk-mitigating strategy doesn’t concentrate on controlling downside risk since their individual positions are strong enough to stand in spite of market volatility. Also, what kept them so high is their smaller size. This may sound atypical, but this position allows them to check on companies that are under the radar of big players, and there are a lot of good ideas to work towards.
Investment Process
The fund manages a concentrated portfolio with between 25 and 30 positions, which can go up to 25% of the overall portfolio.
While most of the market spends the majority of capital on investment-grade bonds, there are a lot of good companies that are graded below that rating. The company doesn’t solely base their investments on high-yield bonds and is willing to look at companies overlooked by other market participants.
The pool of potential buyers is smaller in the high-yield market, and there are a lot of attractive opportunities to be found. Since bonds are still traded manually, there are more price discrepancies, providing more opportunities for gains. On the other hand, high-interest bonds are more negatively impacted by economic conditions than interest rate hikes.
Trade Desk Thesis
Trade Desk (NASDAQ:TTD) is one of the prime examples of their investment strategy—a company that is off the radar but between 2017 and 2018 had a rise in shares of 90%. Most of the gains came as a result of increased earnings during the first quarter of 2018.
Trade Desk runs a platform for programmatic advertising, providing a spot for advertisers to promote their products to their potential customers. The platform allows companies to track who is looking at their campaign and when, so they can target it the best way possible. TV, radio, and the internet all provide the common playground for this approach.
On the upside, Trade Desk is not affiliated with other ad companies, so the clients can trust the company and its independence.
During Q1 2018, the company revenue growth was 100%, producing $6.3 million EBITDA and GAAP net income of $9.1 million. It is not often seen for a small high-growth company to generate positive net earnings in the hyper-growth stage, and that is what makes this opportunity stand out.
Trade Desk at the time of the interview had a market cap near $4 billion and was the leader in their sector. According to Left Brain Capital, the stock price had a lot of room to move in the upwards direction.
Revisiting Trade Desk After Six Years
In the time of the interview, the share price of Trade Desk was below $10, while currently it is near $132. This pick proved to be a complete hit, while it did take some time to gain momentum.
While price was not on the decline, it was growing at a slow pace until early 2021 when it reached $91. Since then it had its ups and downs, but it didn’t go below $40, which is still a significant upside. In 2024 the stock flourished, skyrocketing from $70 to $132.
When analyzing financial reports, there are clear signs of a company's growth. At the end of 2023, revenues reached $2,552 billion in comparison to $1,833 billion a year earlier. This comprises a 23% upturn in revenue. Adjusted EBITDA numbers are also encouraging: $1,056 billion in 2023 to $913 million in 2022.
Data from 2024 shows similar positive signs—growth of revenue for the first nine months from $1,340 billion in 2023 to $1,704 billion in 2024, which is a 27% upturn in revenue. Adjusted EBITDA moved from $488 million last year to $661 million in 2024.
When discussing a six-year investment window, it is a good example of analysis for a long-term investment. In the case of Trade Desk, it is a prime example of a well-identified company that is thriving in the growing market and has enough juice to continue in the same manner.
We would also talk about potential risks of investing in Trade Desk. The fact that most of the stocks are owned by institutional investors is a sign of trust. However, if one or two bigger shareholders decide to exit or reduce stakes, that can reflect on the stock's value in a negative way.
Individual investors own about 19% of total shares, and they do not hold enough power if one or more major stake owners try to push the company in another direction. While these risks are common for a majority of companies, they must be taken into consideration in any case. Currently, the company is on the growth, and it is gaining momentum, without signs of slowing down.
Also worth noting is that Left Brain Capital still owns Trade Desk, and it is the fourth largest position in their portfolio. The company owns 82 thousand shares which represents 4.23% portfolio share showing high conviction that the fund has in this company.
