We Are "Positioned For A Financial And Economic Crisis"
Harris Kupperman's latest take on markets and his fund's positions.
One of my favorite investors that I love reading and following, Harris Kupperman, has offered up his latest thoughts on the market and his fund’s positioning in his investor letter, out this week.
Harris is the founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection.
Harris is one of my favorite follows and I find his opinions - especially on macro and commodities - to be extremely resourceful. I’m certain my readers will find the same.
Please be sure to read both my and Harris’ disclaimers, located at the bottom of this post. The letter has been slightly edited for length and to focus on Harris’ take on markets.
Q2 2024 Investor Letter
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):