SCC PORTFOLIO UPDATE (YTD THRU Q1 2024)
Seven Corners Capital's composite portfolio finished Q1 2024 up ~9%, versus up ~10% for the S&P 500, representing an underperformance of ~1% during the first half of the year. Since the beginning of 2020 (i.e., on a "Pandemic stacked basis"), the SCC Composite Portfolio has appreciated ~119% versus up ~72% for the S&P 500, in each case including all dividends received, representing outperformance of 4,700 basis points versus the index.
“Lethargy, bordering on sloth, remains the cornerstone of our investing style.” --Warren Buffett
The SCC portfolio (top 5) is currently positioned as follows:
The following is an update regarding earnings and other news for SCC's top 5 equity positions (PSHZF, GNW, TPB, SD & RKT):
Pershing Square Holdings (PSHZF), 33% position (Cost Basis: $15.75)
PSHZF, led by billionaire hedge fund manager Bill Ackman, finished Q1 2024 up 11.5%, outpacing a 6.8% increase in its NAV (thus, PSH's discount to NAV decreased to 25.6%):
The long thesis continues to be two-fold: (1) a bet that Bill Ackman will outperform the overall market with his stock picking and uncanny ability to make huge sums via hedging; and (2) more importantly over the near to intermediate term, the closing of the sizable NAV discount. Simply closing the current discount would result in a ~34% appreciation in the stock, assuming NAV were to remain constant.
In PSH's annual report for 2023, Ackman described some changes to the overall Pershing Square structure, aimed at lessening (or hopefully eventually eliminating) the NAV discount, which included a future reduction in fees charged to PSH investors under the Investment Management Agreement (IMA) (emphases added):
"On February 7th [2024], PSH announced certain amendments to the IMA that will have the effect of reducing PSH's 16% performance fee. The amendments to the IMA include: (i) An amendment to the Variable Performance Fee ("VPF") provision of the IMA which will now provide that the Additional Reduction will no longer exclude fees paid to the Investment Manager by Pershing Square funds that are publicly traded in the United States. (ii) An amendment to the VPF provision of the IMA which provides that the Additional Reduction will also include an amount equal to 20% of any management fees that the Investment Manager earns from non-PSH, Pershing Square funds that invest in public securities that do not have performance fees. (iii) The waiver by the Investment Manager of the right to receive the $36 million outstanding balance of unrecovered IPO costs before the Additional Reduction under the VPF provision takes effect.
As a result of the above amendments, PSH's 16% annual performance fee will now also be reduced by 20% of any management fees earned from any non-PSH Pershing Square funds that invest in public securities and do not have performance fees. The benefits of reduced fees include better long-term performance and, we also believe, greater demand for shares from investment managers who are required to report the 'look-through' fees of funds in which they invest. We believe the Key Information Document ("KID"), which requires disclosure of the proportion of fees and (illogically) the interest expense of any fund an asset manager invests in - is one of the principal factors driving reduced demand for PSH, thereby contributing to our wider discount to NAV. By reducing PSH's performance fees, we will generate higher returns, report lower fees on our KID disclosure document, and PSH will become a more attractive investment for all.
On February 7th, we also announced our intention to launch a U.S. closed-ended fund called Pershing Square USA, Ltd., a fund which will largely mirror PSH in its investment strategy and hedging and asymmetric investment approach. With the benefit of the newly modified VPF arrangement, our long-term goal is to reduce PSH's performance fees to zero with the launch of new funds and strong long-term performance. We are limited in what we can share about these plans due to regulatory reasons, but we will inform you as promptly as possible about these developments."
Linked are the most recent NAV performance statistics and monthly performance reports for PSHZF
Pershing Square Capital Management's 13-F holdings can be found here. In addition, PSH continues to repurchase shares under its repo program (see PRs here).
Genworth Financial (GNW), 15% position (Cost Basis: $3.75)
GNW declined 4% in Q1 2024, following a period of significant outperformance during the preceding 6 quarters vis-a-vis the S&P 500.
GNW trades at a discount to its 81.6% ownership stake in Enact Holdings (ticker ACT), which at the end of Q1 was valued at $4 billion (or 20% greater than GNW's $3.3 billion aggregate enterprise value):
The SCC long thesis on GNW involves the eventual separation of GNW's ACT stake from GNW's generally unprofitable long-term care & life and annuity operations. Longer term could see GNW's Life & Annuity business (L&A) value unlocked via a de-stacking transaction (currently L&A is trapped below the long-term care business in the org chart and the applicable insurance regulators must bless any de-stacking). The company has been actively repurchasing its stock in recent quarters.
SCC's discussion of the corporate governance issues plaguing GNW in recent years can be found here.
Turning Point Brands (TPB), 10% position (Cost Basis: $25.60)
Turning Point Brands, up 12% in Q1 2024, is an old standby in the SCC portfolio, having originally been purchased back in Q3 of 2016 (via SCC's investment in Standard Diversified [SDI], which then owned a majority stake in TPB and subsequently merged into TPB in mid-2020). Thus, despite having beneficially owned a stake in TPB for almost 8 years now, SCC has not earned an acceptable return on its (substantial as a portion of the portfolio) investment. Nevertheless, the investment thesis remains that the company enjoys the benefit of a steady compounding business model via its Zig-Zag and Stoker's brands (the waters have recently been muddied by the struggles of its NewGen brands segment, which is now a de minimis portion of the overall pie at TPB).
In light of TPB's poor recent performance (at least, in the stock), the company could become the target of one or more activist investors, with the thesis possibly involving (A) the separation of TPB's legacy cashflowing business (i.e., its Stoker's MST / chewing tobacco and Zig Zag rolling paper businesses) from its perpetually struggling "New Gen" vaping business and/or (B) a substantial increase in the dividend along with a consequent decrease in TPB's practice of taking equity stakes in other companies. Clearly the status quo of treading water is unacceptable for TPB shareholders.
Sandridge Energy (SD), 10% position (Cost Basis: $5.53)
Sandridge is SCC's largest energy holding and was up 7% during Q1. The long thesis here remains that the secular decline in O&G drilling, combined with the revival of inflation generally, will support carbon-based energy prices going forward (in other words, if you own O&G assets, then ESG is your friend). With legendary investor Carl Icahn as its largest shareholder (he owns 13%) and Icahn's former lieutenant Jonathan Frates as its board chairman, Sandridge did an admirable job steering the company away from the abyss of bankruptcy in April 2020 (when, recall, the price of oil dropped to NEGATIVE $40/bbl). The company has cut unnecessary expenses to the bone ("high-grading" SD's well inventory in fact, not just as a management talking point), thereby maximizing free cash flow conversion. SD has also done a great job recompleting and reactivating dormant wells. SD's annual PDP decline is expected (by the company) to remain in the single digits (%age annually) over the next 10 years.
Rocket Companies (RKT), 7% position (Cost Basis: $8.24)
Rocket Companies, which was down fractionally in Q1 2024, represents the newest large position in the SCC Composite Portfolio, having been purchased in December 2022. RKT represents a play on a future decline in mortgage rates if and when inflation becomes subdued again.
RKT shareholders should take a measure of comfort in the fact that the company is ultimately helmed by founder Dan Gilbert, who owns 1.85 billion shares of stock (on an as-converted basis) through Rock Holdings Inc.
DISCLOSURE: Long all of the above.
