Hedge Fund Insights: Voss Capital and Greenhaven Road Capital Q2 2024 Letters

Voss Capital Q2 2024 Letter To Partners

Going forward, beyond rate cuts, we believe that equity performance can finally be more balanced on a sustained basis simply due to the earnings growth rates and revisions across the market cap cohorts coming more into line. In Q2 2024, the Voss Value Fund, LP and the Voss Value Offshore Fund, Ltd., returned -6.8% and -7.0% to investors net of fees and expenses, respectively, compared to -3.3% total return for the Russell 2000 (RTY), -3.6% total return for the Russell 2000 Value, and 4.3% total return for the S&P 500. (SP500, SPX) As of June 30th, 2024, the Voss Value Master Fund's total gross exposure stood at 166.7% and the net long exposure was 91.3%. The top 10 longs had a weight of 72.7%, and our top 10 shorts had a weight of -29.4%. Voss Value Master Fund assets under management stood at approximately $288.4 million and Firm assets stood at approximately $894.4 million as of June 30th, 2024. Voss Value Master Fund Complex: NET MONTHLY PERFORMANCE | 2024 The table below shows the Voss Value feeder fund returns compared to some of the relevant indices: One-by-one old dogmas fall and simple certainties dissolve into new doubts, providing the necessary building blocks for the wall of worry the market is ever scaling. Recall that coming into the year we pointed out that the median strategist's forecast was for a measly 1.8% return in 2024 for the S&P 500, the lowest annual forecast ever. By June, this forecast has bumped up to +9%, which would now imply a ~10% decline between now and year end, suggesting the crowd might still lean too bearish. Most economic categories are reverting to long-term/pre-Covid trends and appear moderately weak to normal. Vivid anecdotal evidence colors investors' views of a struggling consumer, however, there are always winners and losers between categories and within categories, and the aggregate data show that consumers are fine. Part of the weakness of certain consumer spending categories and manufacturing at large can be attributable to the ongoing reversion of consumer spend mix-shift back to services in lieu of goods which had boomed during the covid lockdown era. People are too often ignoring the ongoing strength in services which is twice as large of a spending category as goods at nearly 68% of consumer spending. Typically Wall Street views weak manufacturing PMIs as the canary in the coal mine as a leading indicator for weaker services spending, however, given services spending remains so far below trendline, we wouldn't read as much into it. Most "big ticket", interest rate sensitive consumer discretionary markets have already undergone a severe recession. Existing home sales are mired at 30+ year lows. RV unit sales, as another example, corrected by ~50% from their 2021 peak. The much larger spending category of new car sales experienced a >33% drop off peak, remains 15% below recent peaks, and HSD% below pre-Covid run rates. Economic forces already caused a cleansing wholesale inventory/recession reset in these volatile and rate sensitive categories without having an official recession as Covid stimulus padded balance sheets, the largest non-wartime federal government budget deficit in history, and resilient services spending and business investment have kept us chugging along in this inflationary, higher rate environment. Credit card debt gets disproportionate attention but as a percentage of disposable income is at 5.6% compared to the long- term average of 6.1%. It was 8.3% in 2003, which was at the start of a three-year economic/housing boom (albeit an unsustainable and sub-prime debt-fueled one). Even credit card debt well above average in 2003 was not a good reason to immediately turn too cautious, lest one miss out on another several years of bull market returns. Total household debt rose 4.3% y/y in Q2, slightly outpacing personal disposable income. The household debt to disposable income ratio is at 0.85x, back in line with the pre-Covid level. Serious auto and credit card delinquencies are also returning to normal and are in-line with the pre-Covid level. Many talking heads are remiss when they totally ignore the asset side of America's balance sheet. Home equity, which comprises the "majority of the majority" of consumer's net worth, is up 70% from Q4 2019. While consumer spending gets all the media attention, it is relatively steady and rarely the economic X- factor-business investment is and corporate CapEx is currently growing briskly, thanks in large part to the massive AI infrastructure build out. We think that small caps are mostly being driven by economic variables such as economic surprises vs consensus, the USD, the 10-year treasury yield, corporate credit spreads and similar indicators of financial conditions. While this is not unique in history, the degree to which this is true is currently exaggerated. Pre-2020 all the current correlations certainly existed, but to a lesser degree. Mega caps and a few en vogue companies have gained on the belief that they're able to define their own future independent of macro conditions due to secular growth drivers such as AI build out. The great majority of stocks are viewed as being bound to a handful of macroeconomic variables which have all been vacillating and mixed, hence the choppy road to nowhere for small caps lately. This leads us to believe that any lessening of this belief will give small caps a lot of room to run. The market's path forward around Fed rate cuts depends greatly on economic growth over the next few months. Historically, in the 12 months following the first rate cut there is a ~25% performance difference in the S&P 500 between when the rate cut is followed by a recession vs when it isn't (very few examples of this though). However, we would point out that in this cycle compared to previous Fed cut cycles, there is more forward guidance from the Fed now and thus these returns are already manifesting. Furthermore, we now have two data points since the beginning of July to suggest small caps are a coiled spring poised to reverse their historic valuation discount to large caps. First, dovish comments from Powell along with a weak CPI print in early July sent expectations for a September rate cut to 100% and sparked a 15.6% outperformance by the Russell 2000 over the Nasdaq from July 9th through July 31st. If you blinked, you'd be forgiven for missing a brief growth scare around a weak jobs report (exacerbated by Yen carry trade unwind) causing a flash correction and reversion to trader crowding into secular growth winners. Then, on August 23rd, Powell all but confirmed rate cuts saying, "the time has come," once again igniting small caps with a +3.2% day for the Russell 2000-hopefully a preview of what's to come. Going forward, beyond rate cuts, we believe that equity performance can finally be more balanced on a sustained basis simply due to the earnings growth rates and revisions across the market cap cohorts coming more into line-in other words mega cap tech earnings growth rates are slowing while the rest of the market inflects higher. As the market looks past the election and out to next year, it will notice most of our holdings are exhibiting positive 2025 earnings revisions, which should lead the stocks higher, absent continued multiple compression. Travel & leisure stocks remain deeply out of favor and, outside of cruise operators, remain well below their pre-covid valuation levels. Headlines such as the WSJ's recent article titled "Americans Are Skipping Theme Parks This Summer" offer a glimpse of the current lousy sentiment. We think the misleading headlines along with dour vibes surrounding the US consumer are offering up an opportunity in United Parks & Resorts (PRKS), f/k/a SeaWorld, which contrary to headlines had positive year-over-year attendance growth in Q2. As veterans of concentrated small cap equity investing, we feel like we know a good roller coaster when we see one. The origin of this storied company starts with Adolfus Busch (of Anheuser-Busch fame) and his desire to develop beautiful gardens across the country. For decades these parks, adjacent to his breweries, were used as a marketing tool to build the Anheuser-Busch brand. Over the years, animals and rides were added to the attractions. Busch Gardens Tampa Bay (opened in 1959) and Busch Gardens Williamsburg (opened in 1975) still operate and are among PRKS largest venues. In 1989, Busch Entertainment acquired the theme park division of Harcourt Brace Jovanovich and with it, SeaWorld. Two decades later InBev (BUD) acquired Busch Entertainment as a part of Anheuser-Busch in mid-2008. Being the pragmatic operators they are, AB Inbev began a non-core asset divestiture program to de-lever the business. Blackstone saw this as an opportunity and made a timely acquisition of Busch Entertainment in 2009. Blackstone (BX) surely did their homework and took comfort that this was a resilient business even as the United States was barreling into the worst economic outlook in a generation. The economic storm blew over and operational improvements were made leading to an IPO of the newly named SeaWorld Entertainment in 2013. The current chapter of the saga began around 2017 when Scott Ross of Hill Path Capital was added to the Board (soon to become Chairman). Hill Path began to drive further operational improvements and took bold capital allocation actions, creating the current attractive set up. PRKS now owns and operates 12 theme parks under seven different banners across five states: SeaWorld (in Orlando, San Antonio, San Diego, Abu Dhabi (licensed)), Busch Gardens (Tampa Bay, Williamsburg, VA), Discovery Cove (Orlando), Sesame Place (San Diego, Philadelphia suburb), Adventure Island (Tampa Bay), Aquatica (Orlando, San Antonio). Many of the company's parks are located in geographic locations where they can operate on a year-round basis. About 60% revenue is generated in Florida, 16% in California, and 13% in Virgina. Their key markets with the exception of San Diego have shown employment growth well above the national average over the last two years and have positive demographic outlooks. PRKS is a relatively straight forward business. About 55% of PRKS revenue comes from selling admission tickets, and about 40% of attendance comes from season ticket holders. The remaining ~45% of revenue comes from in-park spending, which include merchandise sales at their retail shops, food & beverage purchases at their restaurants, customized photos, reserved seating at shows, cabana rentals, lockers, games, and other ancillary income. As referenced, Hill Path has been very focused on driving revenue while at the same time being maniacal about removing unnecessary costs from the business, evidenced by EBITDA margins improving from 29.2% in 2018 to 41.3% on a TTM basis. As mentioned, Theme Park operators are being misconstrued currently and are a popular way to express a bearish view of the US consumer-PRKS has over 18% of its float sold short, after all. We take a different view as they have historically held EBITDA flattish through even the nastiest of recessions. In 2002, EBITDA decreased 1.2% before rebounding to a new high in 2003. In 2010, EBITDA bottomed out at 8.2% lower than the 2008 highwater mark before quickly rebounding to a new record high in 2011. This relative strength in weak economic periods is in large part because PRKS provides a compelling value proposition in lean times compared to many alternative family entertainment options (see chart below). In addition, as a regional theme park, PRKS' attendance is much more driven by local residents than Disney or Universal, which can make it more economically resilient as its visitors don't have to pony up for airline tickets and hotels on top of park passes. Both Disney and Universal have hiked ticket prices more aggressively than PRKS post Covid, making PRKS even more of a relative bargain now versus five years ago. We think PRKS offers a differentiated theme park experience from the fantasy, media content driven experiences of either Disney or Universal Studios, as PRKS is oriented around animal content and educational shows. Busch Gardens Williamsburg has been named America's most beautiful park 33 years in a row by the National Amusement Park Historical Association, and SeaWorld Orlando is routinely voted as Best Theme Park in America by various reader's choice awards (including USA Today and Theme Park Magazine). This distinct experience also means PRKS can be a compliment to a Disney/Universal vacation from out of state or international visitors. Historically, Universal or Disney's promotional activities had much more impact on each other than on PRKS attendance numbers. One of the most overt fears and competitive threats is due to a massive expansion forthcoming at Universal Orlando called Epic Universe that is opening in early 2025. New parks and expansions are nothing new over PRKS's multi-decade history. One pertinent case study is the 2013-2014 timeframe when Universal opened a new Harry Potter Diagon Alley to much fanfare. Bears point to the decline in Universal Orlando attendance as evidence of competitive pressure - but we would contend that this was more related to idiosyncratic issues surrounding the damaging Black Fish documentary release. SeaWorld Orlando attendance declines were much less severe than SeaWorld San Diego, showing that the issues at that time were more tied to the negative publicity as opposed to Universal's expansion. PRKS has long since reduced the importance of orcas to the guest experience by investing heavily in new attractions and roller coasters. Orlando is an important market for PRKS to be sure, as it accounts for ~35% of EBITDA. Nonetheless, assuming a 10% decrease from the Epic Universe opening would only amount to a 3.5% headwind to overall EBITDA. The remaining parks would have to grow at ~5.5% to keep overall EBITDA flat. For what it's worth, PRKS management has the clear expectation to grow overall EBITDA in 2025 even in the face of Epic Universe's opening. It's worth pointing out a couple of other underappreciated dynamics at the company. PRKS owns all the real estate underlying their parks (apart from the San Diego SeaWorld location), which totals about 2,000 acres. This includes 400 acres of unutilized excess land adjacent to the parks that are currently under review on how to best to drive value. To wit, from their Q4 2023 earnings call: "First, let me be clear that we believe there is a great opportunity for hotels in our parks. We own approximately 400 acres of developable land adjacent to our parks. We know there is significant vacation hotel demand from guests in our markets and we see an obvious opportunity to generate significant incremental EBITDA and value from hotels in our parks. Second, we have not decided to spend any capital actually constructing hotels and, in any event, we will not spend any capital to construct a hotel without high confidence in achieving 20%-plus ROI unlevered cash-on-cash returns." An additional possible future growth avenue is their highly attractive licensing model. The sole licensed SeaWorld location in Abu Dhabi provides the company with around $10M of high margin revenue with no capital outlay and this model could certainly be replicated in the future. Perhaps the cornerstone of our thesis is that the company has a bold board led by Hill Path's Scott Ross & James Chambers who are likely to execute some form of significant strategic corporate action over the coming years. Ross has made his investment career as a private equity executive with a focus on location-based entertainment and theme park investments. Theme parks can require major capex investments, so a bold board is only a positive if it is married with sound capital allocation - which we believe PRKS has proven it has. The company is not shy in expressing its opinion on the current valuation of the business: "The Board and company believe our shares are materially undervalued. We have significant confidence in our business and our prospects. And as we shared with you last quarter, any reasonable way you look at it, we feel we are materially undervalued and that there is significant upside opportunity in our current share price." Such corporate jawboning is cheap, but this team puts their money where their mouth is as PRKS has been an insatiable share cannibal in recent years, while keeping leverage stable. So, what do we think the likely paths forward could be? With the large and growing Hill Path ownership stake, which will be nearing 60% (including positions controlled through swaps) when the company soon exhausts the current $500 million share repurchase authorization, we think there is an elevated chance of one of the following events happening in the coming years: It's no secret that private equity has long had an affinity for buying cash generative theme park operators and Ross is certainly well connected within the industry. With net debt/EBITDA at a conservate 2.7x, a potential PRKS buyer has plenty of room to juice leverage judging from Blackstone's comfort taking leverage on stable theme park assets above 5.0x in the past. Alternatively, Hill Path has the wherewithal to take the company private itself, and fortunately a deal would have to be approved by a majority of the minority shareholders. Behind door number three is a potential acquisition. Hill Path has shown they have an appetite to do a large M&A deal, such as when PRKS made an (unsuccessful) offer for Cedar Fair in 2022. In such an undertaking there would likely be significant operating synergies, and with Hill Path at the helm, we believe any acquired business would likely exhibit improved baseline margins separate from the operating synergies. We think previous owner Blackstone buying PRKS and combining it with their current portfolio company Merlin Entertainment would make the most strategic sense due to their geographic overlap in key markets and a like-minded operating playbook. Aside from cost synergies, the two could implement attendance driving co-marketing agreements with initiatives such as multi-park passes. Merlin's recent press release highlighting the acquisition of the "Orlando Eye" Ferris wheel cited the company's "strategic focus in building major attraction clusters in key cities, including Orlando." Merlin was purchased (for the second time) by Blackstone in 2019 and is held in its long dated "Core Private Equity Strategy" fund with a stated life of "10-15 or more years," so they are more apt to plan their next phase of growth than seek exit liquidity. Heraclitus said no man ever steps in the same river twice, but he didn't say anything about wave pools. To Jon Gray w e say, come on in, the water is warm. Despite tremendous operational improvements over the recent years, the shares remain stuck at the loading platform. At ~6.8x '25 EBITDA, current valuation is a far cry from theme park stocks' 5-year pre-Covid average multiple of double-digit EBITDA multiples. Furthermore, when we look at transaction comps, the median theme park transaction multiple over the last couple of decades is ~11.0x EBITDA. Aside from the sole acquisition of Busch Entertainment by Blackstone done at 8.0x in the depths of the 2009 financial crisis, no other significant acquisition that we could find data on was completed below 9.9x EBITDA. With shares currently trading at a 2025 P/E ratio of ~10x, we feel like valuation would likely re-rate eventually in the public markets even if none of the strategic paths noted above come to fruition. Shares traded at an average of ~21x forward earnings between 2014-2019. We think PRKS valuation is compelling almost any way you slice it. Our base case price target of $88/share gives the stock +80% upside over the next two years, using a conservative EBITDA multiple of 8.7x (15.0x P/E). This would still represent a discount to its own trading history and to precedent transaction comps. It's a timeless Vossism to look down before looking up, so we must consult our inner Eeyore here. First, there seems to be a tidal wave of supply coming to market, with Disney (DIS), Universal, and the newly formed Cedar Fair all committing to significant multiyear expansions recently. We've articulated why we think PRKS is outside of the capex splash zone, but from a simple supply/demand perspective this is a headwind. Somewhat related, overall attendance has not grown over the decades and PRKS still has a way to go before reclaiming the 2008 attendance record. EBITDA has grown tremendously over the years, but without attendance tailwinds. The parks are by no means operating at capacity, so that is not a governor for attendance growth going forward. If we assume '26 attendance reaches the lowest level in the last 20 years (excluding COVID depressed '20/'21), at 20.8 million and margins revert to '19 levels, we get about $540m of EBITDA. Capitalizing this at 6.8x EBITDA, about the lowest it has traded at in its public history, the equity would be valued in the mid $30's per share. In other words, trough multiple on trough earnings, which seems unlikely to us and if it occurs, is a manageable downside. (We are capitalizing on '26 numbers and assume some free cash flow generation through '25 in these scenarios). In a bull case we see a potential return to historical attendance records along with further margin improvement that could turn this into a multi-bagger. For instance, PRKS lays out a scenario in which the parks return to 2019 attendance levels (international visitors is the only lagging cohort remaining), increase per caps from ~$80 to ~$87, and achieve their cost reduction goals. In this case EBITDA would reach ~$960M in '26 with margins increasing to an impressive ~49%. Capitalizing this at ~10x EBITDA would work out to about a 3x return for the stock. Undoubtedly this is the rosy-cheeked case, but by no means is it pure fantasy. There is a large scope for creative subjectivity to be applied to the combinatorial explosion of data available in markets, and just like a gestalt picture, what at first appears to be one image or conviction emerging from the data can be something entirely different in a flash. You are not affecting the picture when you shift from one perception to the other, both possibilities were already there, you are just making a choice between them by actively toggling your perspective. We must strive to be as objective and as open-minded as possible while we are collecting information, viewing the data from as many perspectives as possible and hopefully settling fastidiously on one that corroborates a thesis from various vantage points. Even then, there are so many contingencies for the market's path forward that no a priori knowledge can be entirely relied upon, however with an embedded margin of uncertainty in our bottom up company assumptions and a double digit FCF yield, we can tolerate some ambiguity and simultaneously remain confident that either the broader crowd or deep-pocketed buyers (e.g., PE funds or strategics) will eventually sniff out the compelling value embedded within our portfolio. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Greenhaven Road Capital Main Fund Q2 2024 Investor Letter

With the passage of time, the results should show up in the numbers, and the quants should eventually see what I see. The Fund returned approximately -5% net during the second quarter, bringing year-to-date returns to approximately -3% net. For context, the Russell 2000 (RTY) was down -3.3% in the quarter and up 1.7% in the first half. Returns will vary by fund and investment class so please check your individual statements. Neither our YTD returns nor those of the Russell 2000 are exciting, but six months is a short time period and we have a concentrated portfolio that will have good bumps and bad bumps along the way. As outlined in the letter, I think the companies we own have continued to make significant progress that was not reflected in their share prices. I believe the market also has fundamental misunderstandings with some of our holdings that will resolve over time. July has been significantly more favorable for the Fund, which is now positive for the year. It is too early to call a massive shift towards "small caps" but at least the conversation is happening, and July's data is encouraging with the Russell 2000 outperforming the Nasdaq by more than 1200 basis points so far. Large caps have had a decade+ run of outperformance, so this is a drop in the bucket. The cycles where large outperforms small and small outperforms large have historically lasted about 10 years. If investors decide that trees don't grow to the sky and they want to own smaller companies - we own a bunch of saplings at reasonable prices, with strong management teams, advantaged products, and favorable competitive dynamics. If capital flows to small caps, I think we are very well positioned. Our results diverged from the larger indices in part because we did not own the largest companies. While I gravitate towards smaller and misunderstood companies, we could own the "Mag 7" and not owning them has been a painful choice. There are two primary reasons for having avoided the "Mag 7" and their brethren. The first is the law of large numbers. Trees don't grow to the sky, and it is really hard to grow a $3 trillion company. Share price can increase by stretching the multiple further (Microsoft is at 14x trailing sales), but to actually grow earnings to support the next $3 trillion of market capitalization is a heavy lift requiring the addition of many hundreds of billions of dollars of revenue. Given their scale and the quality of the businesses, it is possible but certainly unprecedented. The second reason for avoiding the Mag 7 today is that I am not convinced that the long-term winners have been anointed. The rise in their share prices would indicate that the game is over, but will the AI spending boom continue over a longer time horizon? Will there be returns to support it? Microsoft's (MSFT) capital expenditures are running at almost $300 million a WEEK and Google's (GOOG,GOOGL) are approximately $900 million a WEEK which is $180 million per business day. Meta (META) has a similarly ambitious investment program. If Microsoft, Google, and Meta dial back their investments, Nvidia (NVDA), whose share price has 10Xed in 2 years, may suffer. I look forward to experiencing the products that are created by generative AI over the next 10 years and investing in that wave, but I believe there will be fatter pitches than we are being offered today. Time will tell. The baked-in optimism is not limited to the Mag 7. There are many examples, but a simple one is Nasdaq 100 member Costco (COST). Its market capitalization ended June at ~$380B, implying a P/E ratio of 55x for a business that is growing systemwide square footage by 2.5% per year. It could be dead money for almost a decade to get to a P/E of 20. Costco is a great place to shop, but for me the investment case from here is harder. Frustratingly, several of the companies that we own have valuations that are far less demanding than the companies discussed above and I believe have brighter futures. As I approach my computer to look at our portfolio, I've recently found myself humming the children's song that opens with the question, "Do you see what I see?" In the second quarter, the market's answer was a resounding NO. Having a divergent view from the market is not a new phenomenon. We often invest in companies that "do not screen well" in that the GAAP (Generally Accepted Accounting Principles) financials do not tell the full story, and in companies that are in transition where we believe that the historical financials are not indicative of future, or maybe even current, results. These misunderstandings and our variant perception often provide the opportunity to invest before the transformation or true quality of the business is fully reflected in reported numbers. With an ever-increasing portion of market dollars being directed by "passive" or index investors, less and less fundamental analysis is occurring. Morningstar estimates that> 50% of assets are now invested in passive funds. Of the remaining active investors, a not insignificant percentage are likely closet indexers or following some sort of "quant" strategy. Indices buy or sell based solely on their criteria for inclusion - often company size or industry. Their investors are not analyzing the individual companies. As for valuation, indices are often market cap weighted and designed to buy more of what is expensive and less of what is "cheap." There is also a large portion of the market that is "quantitative," looking at historical numbers to use past performance or "consensus estimates" as a proxy for future performance. With several of our companies being covered by only a handful of analysts, and with those analysts typically covering 25-40 companies, I find that the consensus estimates are often built on faulty assumptions, lazy extrapolations, or outdated information. It is fair to say that I am not investing my family's savings (or yours) based on consensus estimates. Maybe the quants' data is bad, but at least they are looking, unlike the indices. Having a different view of a company is entirely useless if the market does not eventually come around and see the value I see. In some cases, the companies are cheap enough and generating enough cash that management can buy back shares to capitalize on the discrepancy, but, in general, the most likely path to getting paid is by having business progress show up in the reported financials. With the passage of time, the results should show up in the numbers, and the quants should eventually see what I see. To help bridge the gap between what I see and what the market sees, we sent our investors an email with links to a series of fireside chats with the CEOs of some of our holdings. In these videos I am trying to tease out and highlight important qualitative factors that will show up in the numbers over the next year or two. If you did not receive the videos, please reach out to [email protected]. If you can only watch one, I would recommend this one with Savneet Singh of PAR Technology (PAR). PAR had a transformative first half of the year, with accomplishments that include: As you will hear in the video, the acquisitions have created opportunities that simply did not exist at the beginning of the year, including: It was a busy first six months of the year with a lot of fantastic progress. Returning to the quality of consensus estimates and the idea of not using them to make investment decisions for my family's (and your) savings, as of quarter-end, four of the analyst estimates being used to form PAR's "consensus numbers" last updated their models in November 2023 according to FactSet. In this case, I think we know the answer to "do you see what I see?" An analyst model from November predates all of the positive developments outlined above. Will the reported numbers end up being different enough to matter? According to FactSet, the consensus estimates are for continued EBITDA losses in Q3 of this year and only $18M of EBITDA next year. However, in both the video linked above and in the last earnings calls, the company has said they will be EBITDA positive in Q3 of this year. As for the 2024 EBITDA number, I don't think $40M is a stretch and $60M+ is possible depending on the investments being made, customer wins, and rollout cadences. So, based almost entirely on things that have already happened, such as winning Burger King and acquiring Stuzo, EBITDA profitability is coming sooner and 2024 EBITDA is likely 2-3X "consensus." This is why we do our own research. With the sale of the defense business, PAR is much closer to a pure-play software business. As a result, they will likely change how they report results, better highlighting the attractiveness of its software business to the market. In addition, with the sale of defense and progress in the core software business gross margins will go up, growth will go up, and profits should inflect higher. This year, I believe that PAR should be able to grow its software business at 25%+ and should be a Rule of 40 software company next year. While that is not what the sell-side-analyst estimates from November 2023 say, I hope we are on the same page when their November 2024 versions come out. PAR ended the quarter at approximately $47. Our Q1 letter ( link) laid out a path to $80 in a year, which is not quite a double, but if my view and the market view do converge, there is significant upside. Alta Equipment Group (ALTG) is another example of a company where my view appears to be quite different from the market's view. I wrote about the company more extensively in the Q1 2024 letter, saying that: "An investment thesis should fit into a paragraph, or in this case a sentence... This business is (1) less cyclical than it appears, (2) generates more cash than it appears, with (3) less debt than it appears, with (4) a significant hidden growing annuity type asset, and (5) run by an owner operator who can grow organically and through acquisition for the next decade-plus, at an (6) attractive valuation." Note that the paragraph above did not mention interest rates once. In fact, it speculated that ALTG was not particularly cyclical. Yet, just this month, at the first whiff of a possible interest rate cut, ALTG's stock ripped 10% on the first day and then another 25%+ over the following few days. Mr. Market appears to be tying ALTG's prospects to interest rates. While lower rates will lower interest expense and may be beneficial to residential construction, Alta Equipment Group's new equipment sales are primarily tied to infrastructure and manufacturing spending, not residential construction. Infrastructure spending should be supported by the Infrastructure Investment and Jobs Act ('IIJA'), which allocates $1.2 trillion for transportation and infrastructure spending, and the Inflation Reduction Act ('IRA'), which allocates $369 billion for fighting climate change and providing energy security. Mr. Market can focus on interest rates, but I see infrastructure spending as the more relevant driver of future earnings and that has already been passed by Congress. To further bolster the case that Alta Equipment Group may be less cyclical than some believe, here is another piece of data that is not in the "historic" numbers. Alta Equipment Group went public in 2020. Thus, most historical financial datasets for the ALTG begin in 2020 even though the company has been operating for 40 years. In 2009, when Alta Equipment Group was primarily focused on forklifts and their strongest geography was Michigan, their two largest customers were auto manufacturers who entered bankruptcy as auto volumes plunged. During this period, the worst in 50+ years for their largest customers wading through bankruptcy, Alta's Parts and Service business was down only 10%. ALTG's cash-generating power is another place where few people seem to see what I see. The financials are complicated because five distinct business lines are forced to be reported in a single cash flow statement under GAAP accounting rules. There are Parts businesses and Services businesses. These are very attractive higher margin "razor blade" businesses. There are also two lower margin (but higher transaction value) businesses selling new and previously rented equipment. These are the low margin "razor" of the traditional razor/razor blade business model. Finally, there is an equipment rental business. The rental business is opportunistic and profitable, but basically exists to eventually sell equipment for future Parts and Service business. Five symbiotic business lines, one set of financial statements, the rules are the rules. Last year, ALTG's rental business distorted its cash flow statement. Of its 40+ lines, two of them are explicitly related to the rental business - (1) proceeds from sale of rental equipment generated $128.9M, and (2) the expenditures for rental equipment used $62M. Looking at the cash flow statement, it appears that the rental business provided almost $67M of cash. However, Alta Equipment Group typically takes rental equipment from inventory, so there is a supplemental schedule outside of the traditional cash flow statement. Quantitative investors are unlikely to adjust their numbers based on the schedule and passive investors don't even know it exists. The schedule is labeled "Net transfer of assets from inventory to rental fleet within property and equipment" and the impact was $180M. When this number is factored in, the rental business consumed roughly $123M of cash last year. I believe, and management has indicated that 2023's rental inventory investment included a ~$40M, one-time catch-up in inventory for the rental business, an anomalous holdover from inventory shortages during COVID. The ALTG share price ended the quarter at $8, down 35% for the year. It is highly unlikely that the quants have connected the dots, and we know for certain that the passive investors don't even look. I see well more than 100% upside from the quarter-ending share price, as we should all see the cash pile up in the coming quarters. The fireside chat with CEO Ryan Greenawalt should provide insights into the stability of the business and how they can navigate economic weakness in their end markets. As one of the newest holdings, the video is meant to provide additional context. Classic/collector car insurance company Hagerty (HGTY) is another holding where the GAAP financials and rote comparisons to "peers" are misleading. The Greenhaven Road view of Hagerty is formed by Kyle Campbell, who I initially brought on board to help with the Special Opportunities/SPAC investments. I believe that Kyle is the "Ax" (most knowledgeable investor) on Hagerty, which lies at the intersection of Kyle's love of cars and complexity. Similarly to ALTG, Hagerty is not just in one business. They have a direct insurance business, a partnership insurance business model where they partner with 9 of the 10 largest auto insurers and all of the top 10 brokers by revenue, as well as a reinsurance business, a marketplace business, and a membership business. Like ALTG, these are all rolled into a single set of GAAP financials. If you just pull the company up on Bloomberg and compare them to other "insurance" companies on a price-to-book or price-to-earnings basis, you will want to short it. The high-level screen is what most people see. Without giving away all of Kyle's sources, suffice it to say that he is not waiting for sell-side research to inform his view. Kyle looks forward to the Hagerty Reinsurance filings with the Bermuda tax authorities the way Knicks fans are looking forward to the season opener this year. Hagerty owns several car shows as part of their stated mission of keeping car culture alive, but these also serve as a customer acquisition and retention tool. Kyle will go to their Greenwich, Monterey, and Amelia Island car shows, partly because he loves cars and they are fun, but mostly because the top 20 Hagerty employees are at those events. Nobody is dishing out material non-public information at these events, but if you want to understand the marketplace business and how Hagerty members perceive these initiatives, attending the auctions sure helps. The mosaic Kyle has developed is far richer than the GAAP financials. He recently presented HGTY at MOI Global's Wide-Moat Investing Summit. Here is a link to his presentation to help you see what Kyle sees and help explain why Markel (MKL) owns 23% of the company and State Farm invested over $550M. In addition to the previously discussed PAR and Hagerty, other top holdings include KKR, Burford, and Cellebrite. Cellebrite (CLBT)- After the quarter ended, Cellebrite was in the news for an unfortunate reason. When the FBI was trying to open the phone of the man who shot at former President Donald Trump, they could not do it in the Pittsburgh field office. The phone was sent to Quantico where the lab technicians used Cellebrite tools and had it open in approximately 40 minutes. This speaks to the power of the tools as well as the ability to sell more licenses within existing agencies such as the FBI. In a perfect world, Cellebrite's products would not be needed. In real life, law enforcement agencies will continue to demand the products and technologies Cellebrite offers to support the ever-growing challenges presented by investigating crimes in an increasingly digital world. Burford (BUR)- In my last letter, I included the ancient Greek saying, "The wheels of justice turn slowly, but grind exceedingly fine." Burford continues to work through a backlog of cases that were slowed by COVID court closures. We expect that the fruits of their labors will begin to be more evident over the coming quarters as they close out longer-duration cases and recognize what are likely large gains on their original capital deployments. As a reminder, their largest "holding" is a $6.2B (~$28 per share) judgement against Argentina related to the YPF case. Each passing day sees nearly $1M of interest accrued to the judgment, which equates to ~$1.40 per share annually for Burford. While there is likely to be a negotiated settlement with the Argentinian government for an amount less than what is owed, Burford's share price indicates that they will recover nothing from YPF and nothing from their investments in substantial meat-related antitrust cases, while assigning minimal value to their asset management business. We have no way of knowing for certain what the precise recoveries will be from these cases, but the risk/reward skew is very attractive from an investment standpoint. KKR (KKR) - The core of my KKR investment thesis is simple: AUM is going up, up, up. In previous letters, I've discussed in more depth why I believe growth is inevitable at KKR. They have the people, products, and business model with a track record of success operating in a market that continues to demand larger allocations of capital. Interestingly, in the last quarter, two high-net-worth individuals I know mentioned they had been steered towards alternative investments offered through their wealth advisors. This should be a more frequent occurrence as KKR and other alternative mangers increase their focus on "High Net Worth" and "Mass Affluent." This past quarter, KKR announced a deal with Capital Group, which manages over $2.6 trillion. As Capital Group said in their press release: "While alternatives have been available to high-net-worth individuals and accredited investors for some time, mass affluent investors, which represent more than 40% of the wealth market globally, have not historically had access to the asset class. This combination of Capital Group and KKR opens the door for more financial professionals and their clients to access alternative investments as part of their portfolios." "High Net Worth" and "Mass Affluent" typically have a private equity / private credit allocation of near zero. It is an easy sell for a wealth advisor, and the fees/commissions can be materially higher than an index fund. The conditions are ripe for more and more of your friends to be sold "alternatives". I am not saying that investing in KKR's retail focused funds will be great investments, but we own KKR, which manages those funds. AUM is going up, which means fees are going up, and with the operating leverage inherent in the model, earnings are also going up. I have spent pages writing about discrepancies between what I see and what the market sees. One area where we see the same thing is insider ownership. We own several companies with very high insider ownership including: While high insider ownership does not guarantee anything, I view it as decreasing the likelihood of misguided acquisitions or short-term thinking and an indication that management is thoughtful about capital allocation. Shorts We remain short the flying taxi company that has the trifecta of regulatory risk, technology risk, and business model risk - and you could arguably throw in a healthy dose of execution risk. We are short two companies facing significant litigation with the potential for treble damages (i.e., 3x the actual amount) for their actions and potential liabilities far in excess of their market capitalizations. The litigation will take time to play out, but given the low margins, commodity nature of their product, and capital intensity, I believe it is an unlikely candidate for a GameStop-type short squeeze and believe it has the potential to decline by 50% or more. We are also short two major indices and bought some "insurance" in the form of out-of-the-money options in late December when option prices made the risk/reward more palatable. The puts will soften the blow of any major decline in equity prices and are both an insurance policy and allow us to remain invested. Outlook We are clearly entering a period where there will be a lot of cross currents. There is an election in the U.S. where we don't even know the final candidates. However, we do know that jawboning on tariffs, corporate taxes, foreign policy, and other policy proposals will roil through the financial markets. Interest rate cuts are on the horizon. While most of these headlines will have virtually no impact on the operations and earnings of the companies that we own, the multiples investors are willing to pay may gyrate. I expect more volatility. Over time, however, I think that the market will see what I see, there will be a convergence in the reported numbers, analysts will adjust their models, and cash will still be cash. Thus, I am going to end this letter as I did last letter...This is not easy or fun right now. This is the slog as we wait for the share price to budge, but we are backing some very talented teams attacking large markets with secular tailwinds. In this case, I think Charlie Munger is right again-the big money is in the waiting. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.