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To My Partners:
Tourlite Fund, LP Founder Class returned -2.8% for the Third Quarter of 2022. The fund has returned 1.6% since inception in April 2022, compared to a -20.2% decline for the S&P 500. [1],[2]
|
Third Quarter 2022 |
Since Inception (4/1/22-9/30/22) |
|
|
Tourlite Founders |
(2.8%) |
1.6% |
|
S&P 500 |
(4.9%) |
(20.2%) |
Portfolio Update
At the end of the quarter, our portfolio’s sector concentration represented: consumer (~50%), industrials (~35%), and technology (~15%).3 The Fund’s net exposure continued to remain low during the third quarter. Our gross exposure during the quarter at ~150%, continued to remain lower than our expected range (180% – 250%).
Portfolio Exposures5
|
Long Exposure |
Short Exposure |
Gross Exposure |
Net Exposure |
|
|
Dollar Exposure |
78% |
(75%) |
153% |
~3% |
|
Beta-Adjusted Exposure4 |
85% |
(85%) |
170% |
~0% |
In the third quarter, the dominance of macroeconomic factors and factor exposures continued.6 We believe once correlations break down, there will be a strong opportunity for fundamental investors to capture the resulting spread. Until we see a shift in the market regime, from macro towards share prices driven by business fundamentals, the Fund remains focused on downside protection while addressing the optimal time to start playing offense. We plan to aggressively increase our gross exposure as correlations within factors break down and as the anticipated spread between our long and short portfolio increases.
While we experienced a drawdown during the quarter, primarily in August, we believe that there are positive takeaways. Since inception, we have experienced very low correlation to the overall market and our risk management process has been implemented to protect capital.
As the market melted up during the early weeks of July, we added exposure to “aggressive short” positions.7 We were early as these companies continued to outperform though mid-August as a result of a large amount short covering and the reduction of risk in the market. At times, these securities can be highly correlated to one another, and performance can be disconnected from business fundamentals.
Perimeter Solutions (PRM)
On August 5th, Perimeter, one of our largest long positions, reported earnings and its stock price declined ~10%. We believe the initial reaction was overdone due to a potential misunderstanding of the Fire Safety business, which experienced a decline in reported margin due to passing through higher input costs. A majority of PRM’s contracts are structured to pass through input costs, both rising and falling, and preserve EBITDA dollars.
After recovering from its negative earnings reaction, the stock continued to sell off in September. Perimeter trades at an attractive ~8.5% 2023 free cash flow yield.
Undisclosed Short Position
In August, the Company reported inline revenue and lowered full year revenue guidance by ~10%. The stock spiked ~20% the following day, eventually giving back those gains within the following two weeks. This scenario was common with higher short interest companies during August. As a result, we monitor our exposure to “aggressive shorts”, individual factor exposures, and short interest.
Select New Positions
New Long: Verra Mobility (VRRM)
Verra Mobility is a leader in transportation technology. The business has three segments: commercial, government and parking. The commercial and government segments represent 85%+ of revenues. Verra is an attractive business with mid-to-high single digit revenue growth and sustainable competitive advantages.
Commercial services provide tolling services and violation management for commercial fleets (i.e., rental cars). Verra is integrated with tolling authorities and has a revenue split with rental car operators. The business should benefit from two key tailwinds including the continued shift from cash to cashless tolls and conversion of highways to toll roads. Currently ~65% of toll booths are cashless and that is expected to grow to over 80% over the next few years. Verra is highly integrated into the rental car system with long-term contracts and technology that would be expensive to replicate.
The Government segment offers solutions to cities and school districts including red-light, speed and bus lane camera enforcement. Most of these relationships are revenue shares and Verra maintains ownership of the hardware/cameras. Future growth will come from expanding offerings to states with limited current enforcement (i.e., only have red light cameras) and breaking into the 17 states with no photo enforcement.
Based on our projections for 2023, Verra trades at over a 7.5% free cash flow yield.
New Short: Canadian Retailer
The retailer was a beneficiary of the pandemic which put a pause on secular headwinds, which are likely to resume. The company’s poor position within its competitive landscape is likely to continue pressuring organic growth and margins. A material portion of operating income is produced by its financial services segment, extending credit to low-income customers, which adds additional risk in the current macro environment.
Market Outlook
In the third quarter, the dominance of macroeconomic factors and factor exposures continued to result in high correlation between securities in the market. We continue to remain cautious about the economic outlook over the coming quarters. While the market appeared optimistic for a pivot in policy by the Federal Reserve, comments by members of the Fed affirmed its continued fight against inflation.
There are a few factors which lead us to believe the October rally may continue during the fourth quarter before a slowing economy drives earnings lower in 2023. From September 12th, when August CPI reaccelerated, the S&P 500 declined -12.7%. Market tone shifted from a potential pivot in Fed policy, back to reaffirming the fight against inflation. With the odds pointing towards cooling inflation and global fears of economic stability, a dovish shift in the market’s perception is possible.
Coming into the quarter, positioning of long/short funds are at 5-year lows. Earnings estimates for 2022 are -3.8% lower than at the beginning of the year, while economic conditions have yet to be impacted from the Fed’s recent tightening. While we believe earnings have room to fall in 2023, the third quarter of 2022 seems to have held up. Bearish positioning with better-than-expected reported earnings could push the market higher in the interim.
To update our analysis from our July letter, over the first nine months of the year, the S&P 500 returned -23.9% and the NASDAQ Composite declined -32.0%.8 Since the beginning of the year, consensus estimates for the S&P 500 Ex-Energy have declined -3.8% for 2022 and -4.0% for 2023. Current consensus estimates imply a year-over-year increase of ~9% for 2022 and ~11% for 2023. We continue to see the same downside risk to earnings in the case of economic contraction.
Past Peak to Through Declines9
|
SPX Price |
2023 EPS |
P/E Multiple |
|
|
Dot-Com Bubble Burst |
(51%) |
(26%) |
(43%) |
|
Great Financial Crisis |
(58%) |
(50%) |
(28%) |
|
YTD as of Sep. 30th |
(26%) |
0.0% |
(27%) |
|
YTD as of Sep. 30th (ex-Energy)10 |
(27%) |
(4%) |
(27%) |
We performed the same analysis to measure the correlation within factors between the top five companies on key “Factors to Watch” on Bloomberg and the holdings of the ARK Innovation ETF (ARKK).11 The data shows that while correlations remain at elevated levels in the third quarter compared to 2021, they are mixed compared to the first half of 2022.
Increase in Daily Correlation Among Top Constitutes[12]
|
Growth |
Value |
Volatility |
Momentum |
ARKK |
|
|
H1 2022 vs. 2021 |
|||||
|
Average |
+26% |
+17% |
+35% |
+28% |
+28% |
|
Median |
+27% |
+16% |
+45% |
+40% |
+27% |
|
Q3 2022 vs. H1 2021 |
|||||
|
Average |
-7% |
-7% |
+4% |
-7% |
+10% |
|
Median |
+3% |
+0% |
-14% |
-11% |
+9% |
Operational Update
In addition to our prime brokerage account with BTIG, the Fund opened an account with Interactive Brokers LLC to increase the trading capabilities for the Fund.
Past investor letters can be found on the Investor’s section oftourlitecapital.com. An overview of our investment strategy can be found in our 2022 Second Quarter letter. Please reach out to ir@tourlitecapital.com for access.
Thank you for your trust and support. Please feel free to reach out to me with any questions.
Sincerely,
Jeffrey G. Cherkin
IMPORTANT NOTESThis letter is being furnished by Tourlite Capital Management, LP (“Tourlite”) on a confidential basis to recipient and does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services. Such an offer or solicitation of an investment in Tourlite Fund, LP (the “Fund”) may be made only by delivery of the Fund’s confidential offering documents that contain a description of the material terms relating to such investment, of which this letter is not a part. The information and opinions expressed herein are provided for informational purposes only, are as of the date indicated, are summary in nature, are not complete, are subject to change and should not be relied upon by any person in making an investment decision. An investment in the Fund is speculative due to a variety of risks and considerations as are detailed in the confidential offering documents of the Fund, and this letter is qualified in their entirety by the more complete information contained therein. This letter is strictly confidential, and the information contained herein or provided herewith may not be disclosed or distributed by the recipient to any other person (other than the recipient’s affiliates, partners, members, directors, officers, employees and advisors and other agents who have a legitimate need for such information in connection with evaluating the recipient’s investment). Your receipt and review of this letter constitutes your agreement to comply with these provisions. An investment in the Fund involves a significant degree of risk, and there can be no assurance that its investment objectives will be achieved or that its investments will be profitable. This letter contains various estimates, targets and projections that are based upon various assumptions made as of the date such estimates, targets or projections were developed. Actual realized returns on unrealized investments and proceeds will depend upon various factors including, but not limited to, future operating results, the value of the assets and market conditions at the time of any disposition, any related transaction, operational and other costs and the timing and manner of sale. While estimates, targets and projections provided herein are believed to be reasonable approximations based upon available information available to Tourlite as of the date of this letter, no guarantee or assurance can be provided as to their accuracy or that such estimates, targets or projections will be achieved or met. Unless otherwise noted, the performance results of the Fund included in this letter are presented on a net-of-fees basis and reflect the deduction of, among other things, underlying management and performance fees and expenses as well as brokerage and/or custodial fees and expenses. Performance results also include the reinvestment of dividends and other earnings. Certain of the performance information presented in this letter are unaudited estimates based upon the information available to Tourlite as of the date hereof, and are subject to subsequent revision as a result of the Fund’s audit. An investor’s actual performance and actual fees may differ from the performance information shown due to, among other factors, capital contributions, withdrawals and eligibility to participate in “new issues.” The value of investments can go down as well as up. Past performance is not necessarily an indication of future performance or profitability. References to Dow Jones, S&P 500, NASDAQ, Bloomberg and other indices herein are for informational and general comparative purposes only. There are significant differences between such indices and the investment program of the Fund. The Fund does not invest in all or necessarily any significant portion of the securities, industries or strategies represented by such indices. References to indices do not suggest that the Fund will, or is likely to, achieve returns, volatility or other results similar to such indices. Certain information set forth in this letter is based upon information obtained from various third parties believed by Tourlite to be reliable. Neither Tourlite nor any of its affiliates has independently verified any such information and they shall not have any liability associated with the inaccuracy or inadequacy thereof. This letter and the accompanying discussion include forward-looking statements. All statements that are not historical facts are forward-looking statements, including any statements that relate to future market conditions, results, operations, strategies or other future conditions or developments and any statements regarding objectives, opportunities, positioning or prospects. Forward-looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties and contingencies. Forward-looking statements are not a promise or guaranty about future events. The information in this letter is not intended to provide, and should not be relied upon for, accounting, legal, or tax advice or investment recommendations. Each recipient should consult its own tax, legal, accounting, financial, or other advisors about the issues discussed herein.
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Footnotes1 Any net returns presented herein reflect the returns of the Fund assuming an investor “since inception”, with no subsequent capital contributions or withdrawals. These returns are not necessarily indicative of your net returns in the Fund, and you should follow-up with Tourlite if you have any questions about the returns presented herein 2 Bloomberg Total Return. Market returns and all share price data as of September 30th, 2022 3 Industry gross exposure 4 Beta-adjusted exposures are calculated relative to the S&P 500 based on six-months of historical daily returns 5 Approximate based on portfolio construction at beginning of fourth quarter. 6 See Market Outlook section 7 Our philosophy for our short book was discussed on page 5 of our 2022 Second Quarter letter 8 Bloomberg Total Return 9 Bloomberg data. Trailing EPS except for current period 10 S&P 500 Ex-Energy from January 2022 to June 2022 11 We used the same data set of companies as our 2022 Second Quarter letter to maintain consistency 12 Tourlite analysis. Growth = 5-year actual sales growth. Value = PORT US Value. Volatility = 3 Month Volatility. Momentum = PORT US Momentum |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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