April 14, 2021
9 minutes of reading
This story originally appeared on ValueWalk
Apis Capital Flagship Fund comment for the first quarter ending on March 31, 2021.
Our Flagship Fund had a net gain of 4.7% in Q1 2021. In the last quarter, our long-term fund contributed 10.1% (gross), while our shorts decreased by 3.4. % (merge). At the end of March, the Fund net bought about 58% with a long portfolio of 88% and short term 30%.
Performance Overview (Gross Profit)
Stable returns for Flagship Fund in the first quarter and almost match global indices, despite our net worth. investment portfolio exposure is kept at approximately 60%. While the favorable trend for small-cap stocks continues to be favorable, the industry’s shift from last year’s tech offspring to more cyclical and industrial sectors has been well underway. time. After poor performance on shorts in January, the “Reddit effect” eased in the last two months of the quarter, allowing for equally steady short-term returns for both months.
While all regions contributed in March (led by Asia), Asia contributed 3.7% to gross profit for the quarter, while Europe increased by about 3.1% during the same period. North America fell slightly, still recovering from the short losses suffered in January. Among industries, Industry and Materials contributed 5.2%, while Technology increased 2.7%. One of the notable detractors was Healthcare, which was largely driven by the detrimental volatility of shorts during the last week of January.
Notable long-term winners are the names we’ve highlighted before, such as Evolution Gaming (2.2% contributor), Ingredient Darling (1.4%) and Tokai Carbon (1, 2%). Notable detractors, who were the winners last year, were Rush Street Gaming (-0.7%) or those allegedly damaged by reopening like online retailer BHG Group ( -0.6%). In short, GSX Techedu deserves a mention. GSX started the year trading around $ 50 (per share) and rose to over $ 140 in January, only to end the quarter at around $ 33. If we held the same position throughout Q1, that would be a good contributor to performance, but risk management forced us to recognize some of the losses in the January bull run. coated. Near the end of the quarter, GSX plunged when it was revealed that it was part of a squeeze designed by today’s infamous Archegos Capital. Why do many brokers offer five times leverage to someone (by the way, previously committing power line fraud and insider trading1) to help an engineer overpower a fraud company The island in China is disappointing. Shame on all that is involved. Shortening is hard enough without our own brokers working against us.
Portfolio outlook and positioning
The first quarter of 2021 can be expected to be volatile. The markets are shifting their focus from safe, defensive businesses to those that have survived the lockdown and have strong resilience like economies open again. Yet another cross current is the constant effect of the spectacular stimulus that has blown away all speculation from SPACs to intergalactic travel dramas. In the first quarter, we saw the market shift focus away from these more speculative areas.
It looks like the prospect of reopening will bring sobering – possibly a direct result of fewer stimulus tests being sent to day traders. However, the outlook is barely clear as both the US Federal Reserve and the ECB are committed to keeping current levels extremely low. interest rate for at least another year or two. Furthermore, the taboo on higher inflation has been removed, as any (apparently ongoing) spike is clearly considered temporary. With caution being thrown in the wind, it looks like the central bank’s monetary stimulus will continue for the foreseeable future even as inflation intensifies. As always, we build our portfolio from the bottom up while carefully taking these macro factors into consideration. With this in mind, we have begun to study more speculative shorts when they become active. We have detailed some of these names for your reference below.
AMC Entertainment Holdings, Inc. (US – $ 4.3 billion market cap)
Before the COVID-19 pandemic, AMC was a “melting ice” for short years and was part of the list of cinema companies that we have acquired (including Cineworld, Cinemark, Marcus, etc.) in the secular theme of film decline global participation. Some of our best-looking shorts have a deadly combination of reduced sales and excessive debt, with the AMC being a prime example. Sure, COVID-19 massively accelerate their problems and despite our view that it is “zero” we (fortunately) mentioned the low single digits because of short positions in stocks. Penny coupons can often be tricky.
Thanks to its enthusiasm in the retail sector (or perhaps more “like Archegos” monstrosities), AMC literally rose from the dead. Today’s market cap is higher than at any time in its history while debt is twice as large as it was two years ago, meaning that enterprise value (EV) is now at close to $ 16 billion, or roughly three times more than in the past few years. As a simple thinking exercise, let’s say sales return to their previous peaks (hard to do with fewer theaters, fewer seats, a shortened or no release window, home theater performance, etc.) and today’s AMC is trading at 3 times EV / multiple compared to before the pandemic. Is the AMC worth three times its value two years ago? Weirdo!
Yamashin Filter Corp. (Japan – market cap $ 570mm)
The main business of Yamashin Filter is the supply of filters used in hydraulic excavators. This core business is niche but cyclical, growing at or slightly above GDP and with decent margins. However, management is destroying shareholder value by entering the consumer mask business. Throughout 2020, the company built great expectations for this new business, only to deceive investors with drastic cuts in guidance just months later. Management announced the masking business would generate ¥ 3 billion in revenue and 910 mm in profit, but just three months later, this revenue target cut by 2/3 and changed the profit guidance. their into holes. Meanwhile, it continues to spend on expanding production capacity for this commodity. At 89 times next year’s earnings, which we think is likely to disappoint, we see even more downsides.
Neuro Corp. (US – $ 5 billion market cap)
We abbreviate Nevro, a medical equipment company that specializes in spinal stimulation (SCS) for chronic pain conditions. Our thesis is based on continuous negative operating margins in the context of constant revenue growth, limited real-world efficiency of their flagship Senza equipment and evidence of a re-planning. in which they have compensated doctors for their implantation. Perhaps the reason their device is so difficult to set is because their device has poor actual results. Many doctors confirm that patients often react early on treatment to just let any effect go away within about 6 months of treatment and more than 75% of patients require an implant within a few years … Incorrect records of the company’s “best -class” purposeful device. Ultimately, the company appears to be engaged in a kickback plan to promote transplantation as reported by European investigative journalists citing contracts suggesting payments of around $ 10k per procedure. for Swiss doctors. While there is no liability in Switzerland for medical device returns until 2023, we suspect this type of behavior is limited to Switzerland. With sales over the past few years stagnant in the $ 350- $ 400mm range and growing losses, we can hardly justify a current $ 5 billion valuation.
CD Projekt SA (Poland – market cap 4.9 billion USD)
We are also brief shares by CD Projekt, developer and publisher of Polish AAA video games. CD Projekt is the 11th largest company on the Warsaw Stock Exchange and the 14th largest pure game developer in the world. The company has gained a strong reputation and been admired by gamers for the quality of their games, usually single-player storyline games. Most notably, CD Projekt, known for the Witcher series, has sold more than 50 million copies since the game first launched in 2007. More Different franchises and launching multiple projects at the same time, CD Projekt has historically only worked on a single game at a time with 4-5 years between releases. Recently, the company drew attention to the launch of its newest game, Cyberpunk 2077. Cyberpunk is one of the most anticipated launch games in recent memory, and consensus expectations have put it on the list of best-selling launch games of all time. While our initial thesis focused on the belief that expectations were simply too high, the launch was far more catastrophic than we could have imagined. Game reviews were generally positive in the pre-launch days, however they were revealed to be based on the higher-performing PC version of the game that CD Projekt provided to reviewers. As it turns out, the console version of the game had so many bugs that the game was almost impossible to play. This is such a problem that within a week of its launch, Sony removed Cyberpunk from its PlayStation Store “until further notice” and as of early April, it has yet to return. Now four months after launch, new copies of the game can get a 30% discount on Amazon. CD Projekt has done a lot in this game and will now spend a significant portion in 2021 fixing bugs and trying to get the attention of fickle gamers instead of rolling out additional content and Previously planned multiplayer expansion. While CD Projekt might turn things around, the industry’s history with previous failed game releases is not a good omen. By the time the company can match the ship, their possible players will move on.
While stocks are down more than 50% from their launch, they are still trading at approximately 20 times revised consensus earnings in FY21; Earnings are likely to gradually decline over the coming years (EPS declines at a CAGR of 17% over the four years following the launch of Witcher 3) as the company moves on to the next big game. This compares to a P / E multiple of 20 times for industry peers like Activision and EA with more predictable game releases and EPS growth. Furthermore, we believe consensus estimates may still be too high. According to our math, they imply other 10-15mm copies of Cyberpunk will go on sale in 2021, which means that Cyberpunk will sell almost as many copies in the first 12 months as Witcher 3 is introduced. critically appreciated after 5 years. If CD Projekt fails to revive Cyberpunk, we believe the consensus estimate over the next one and two years could be cut by up to 50 percent with a commensurate drop in the share price.
As always, we encourage your questions and comments, so feel free to call our team here at Apis or Will Dombrowski at +1.203.409.6301.
Portfolio Management & Member Manager
Research Director & Member Management