During the second quarter of 2024, Praetorian Capital Fund LLC (the “Fund”) depreciated by 1.69% net of fees.* Given the Fund’s concentrated portfolio structure and focus on asymmetric opportunities, I anticipate that the Fund will be rather volatile from quarter to quarter. During the second quarter, our core portfolio positions were something of a mixed bag, with advances and declines, while the Event-Driven book produced a decent return, though we gave some of those gains back in June.
During the first half of the year, effectively all of our net performance has come from the Event-Driven book, with only minor returns from our core book. This shows the power of the Fund’s integrated strategy where the two books are meant to offset each other. That said, I’m somewhat surprised that the Event-Driven book has done as well as it has, given that we’ve been in an environment with unusually low realized volatility, and a reduced number of corporate events to play.
In my experience, the Event-Driven book does poorly in an environment where the market slowly drifts higher, especially an environment led by a handful of tech names. The current market regime reminds me of periods during the last decade, before the launch of this Fund—it wasn’t fun. As a result, following a number of losing trades in June, I’ve chosen to reduce our Event-Driven exposure dramatically. I plan to do very little until October, unless the market experiences a bout of volatility. There are times when EventDriven is surprisingly lucrative, and periods where it just doesn’t work. We are experiencing the latter, and it seems foolish to try and press ahead when it’s an environment that isn’t conducive to profits. Having traded for over two decades now, I know when it’s better to simply step away from the Event-Driven book. This feels like one of those times.
Fund Positioning
We don’t currently own any Nvidia (NVDA – USA). For a few brief moments this year, we were even betting against NVDA (shame on me!!). With the exception of a handful of mega-cap tech companies, most equities have been rather rangebound, as evidenced by the 4.96% return for the S&P 500 equal-weighted index during the first half of 2024. As an investor, it’s easy to bemoan the bubble in all things AI (really just one stock), but I won’t do that on these pages. My job is to find inflecting trends, and AI certainly is inflecting—to what, I don’t know—but it's inflecting. Hence why the market got excited about it.
At the same time, many of our positions are rangebound, because their results haven’t been extraordinary. Put simply, there hasn’t been much of an inflection in their results—yet. Sure, it’s easy to complain that the market is distracted by AI and ignoring how cheap our names are, but the market is rarely wrong. Individual investors can be wrong, but the market isn’t often wrong. The market doesn’t care if something is cheap—the market cares if reported numbers are improving rapidly. With a few exceptions, that hasn’t been the case with our names. However, in the instances where the reported numbers have been improving, the market has taken notice and paid us kindly—even if the stocks are of the curmudgeon deep value genre, far from the glamor of AI. The market is working as it should be—it’s our core investment positions that aren’t.
Let’s look briefly at Tidewater (TDW – USA), a position that we started buying in January of 2022 at a price of around $12. The shares ended June at approximately $95. What led to such dramatic price appreciation?? Well, in the first quarter of 2022, the company reported $105.7 million in revenue and an adjusted net loss of $11.7 million. Fast forward to the first quarter of 2024, and the company reported revenue of $321.2 million and net income of $47 million. More importantly, the company guided to 2024 revenue in a range of $1.40 to $1.45 billion and gross margins of 52%, which is quite the improvement over $361.6 million in revenue, and a gross margin of 28% reported in 2021, the most recently available numbers when we were purchasing shares.
Sure, Tidewater is an old economy, highly cyclical, oil services business. It’s the sort of business that the market currently has extreme disdain for. I like to joke that the cool kids in finance wouldn’t even think to look at it. However, none of this matters—when a company produces results, the shares respond. Inflection investing works in most market environments—even ones where most market participants are chasing an AI bubble—assuming there actually is an inflection in underlying financial performance. Unfortunately, for every Tidewater in our portfolio, we own a number of positions that did not produce outstanding financial results thus far in 2024. Without an inflection in performance, there has been no inflection in their share prices. While I remain optimistic that these companies will have results that inflect positively in the future, until the results actually inflect, the market simply doesn’t care—hence the rather meager returns thus far during the year.
Now, don’t get the idea that we own a bunch of loser companies. Rather, I believe that we own positions that are simply consolidating within strong, already-inflecting trends, with many of our positions having already appreciated strongly for us. However, until current results show another period of uplift, the share prices likely won’t either. We aren’t investing in AI, where the next century of supposed profits gets capitalized today—we’re investing in ‘boring’ businesses, where the shares do not care, until after the results have been announced. In some ways, this is my edge; I hope to estimate the future results before they’re crystallized and profit from that knowledge—while it is also a curse: we have to wait for that crystallization before our shares appreciate.
Looking briefly at our four largest positions (in weighted order):
• The price of uranium has more than tripled at one point, since we first started buying it, peaking out at a spot price of roughly $107, per = Numerco, before pulling back to around $86 at quarter end. While no one can predict the future price of a commodity, there’s a good reason to believe that following the recent consolidation for nearly half a year, it’s overdue for the next move higher.
• Valaris (VAL – USA) has been rangebound for over two years now, awaiting the signing of new contracts at current market rates, that will replace expiring contracts that are frequently less than half of current prevailing rates. There have been some questions as to why the company has been slow to sign new contracts. However, I believe that management is trying to trade a slightly reduced price for increased duration of contract tenure, and that’s the reason for a lack of commentary on new contracts. Should the company announce new contracts at anywhere near current market rates, I believe that the shares will respond in a rather dramatic way—especially as Valaris is by far the cheapest of the large drilling companies (based on the enterprise value per rig metric), despite having one of the best fleets and strongest balance sheets. Between our common and warrant position, Valaris was our 2nd largest position at the end of June.
• St. Joe (JOE – USA) has also been mired in a 3-year consolidation of the share price. This seems odd to me since by almost any objective measure of Florida property values they’ve appreciated substantially—particularly in the Florida Panhandle, where St. Joe owns most of their assets. Once again, sometimes, the market waits until the next set of bullish results has been released, and in an environment with elevated interest rates, I can understand why investors would be hesitant to own the shares of a company that is tied to housing and commercial real estate—particularly as data from the various county registries where St. Joe operates, show a recent slow-down, within what appears to be a multi-decade bull market.
• A-Mark (AMRK – USA) has had subdued results over the past few quarters. This was all before gold hit a new all-time high in US Dollar terms, while silver caught a bid during the first half of the year. I believe that investors will eventually experience FOMO and buy physical metals in greater quantities, and at wider spreads. Recent web-scrape data shows an uptick in both data-sets, following a nadir during the first calendar quarter. However, as is often the case in small-cap value investing, investors are hesitant to bid up a stock, until the results have actually been released. Additionally, one quarter doesn’t always make for a trend. That said, I believe that should gold keep making new highs, A-Mark’s business should do substantially better, with investors also ascribing a premium multiple to it, as there are so few ways to get exposure to a bull market in precious metals, outside of owning mining equities.
