Bireme Capital May 2024 Investor Letter

Torsten Asmus/iStock via Getty Images In the first five months of 2024, Fundamental Value returned -10.9% net of fees, significantly underperforming the S&P 500’s (SP500, SPX) return of 11.3%. FV is now up 388.0% net since inception in 2016 vs the S&P at 190.7%, an annual outperformance of 7.7%.1 For monthly performance see our tearsheet. Our 2024 returns thus far have been extremely disappointing. However, despite this underperformance – in fact, because of it – we are feeling increasingly encouraged about the prospect of strong relative returns in the future. We have doubled down on our strategy of differentiating ourselves from the S&P. We have increased the scale of our investments outside the US, and added to our short book inside the US. Much more below. Market commentary In our last letter, we wrote that the market was pricing in an immaculate landing: Equities are priced for a Goldilocks economic scenario: not too hot, not too cold. A hot economy with stubbornly elevated inflation is a problem for valuations. A cold economy with recession is a problem for earnings. Our personal view is that the too-hot scenario is the most likely – the labor market and hence the consumer remains extremely strong – but either outcome seems possible. At that time, the market was pricing in nearly six rate cuts to the federal funds rate for 2024. We pointed out that six cuts in a year is typically associated with a sharp recession – “totally incongruent” with expectations for 10% S&P 500 nominal earnings growth (which, when paired with falling inflation, implies exceptional real earnings growth). Further, we wrote that the market was likely “underestimating the stickiness of inflation.” Headline year-over-year inflation declines masked continued worrisome underlying data. Secular changes including deglobalization, rapidly aging populations, and indefensibly profligate and procyclical US fiscal policy also create inflationary pressures. Suffice it to say that our concerns have not eased; for much more detail, please see our December letter. The market has come around to our view on inflation, now pricing in only one rate cut in 2024. Nevertheless, the market soared 11.3% in the first five months of the year, pushing valuations back to eye-watering levels. The S&P currently trades at 24.5 times trailing earnings, for an earnings yield of 4.1% – below the 4.3% yield on a risk-free ten-year Treasury bond (US10Y). Thus, the equity risk premium, however you’d like to calculate it, is perilously thin. We wrote Apex of a Bubble in September 2021, opining that “extreme valuations presage real returns that investors will find severely disappointing – and likely negative – for many asset classes over years to come.” Since then, long-term nominal and real yields are both up 3%. We continue to be surprised and alarmed that higher interest rates have not resulted in a higher discount rate applied to the market. When nominal interest rates were low and real interest rates were sharply negative, the “Fed model” was commonly used to justify elevated equity valuations. The Fed model posited that because bonds and equities compete for investor dollars, low long-term bond yields meant equity yields should be very low as well. Today interest rates have normalized, and limited cuts are on the horizon. What justifies high valuations now? Earnings growth has been fine but not exceptional. From 2021 to 2023, earnings grew 5.7% annually. Inflation ran at a 4.9% annual pace during those two years, so real earnings growth was a modest 0.8%. And that earnings growth has not been healthily and evenly dispersed – Nvidia (NVDA) alone drove 37% of the S&P 500 earnings growth over the last 12 months. Over the past year, five companies in the S&P have had their earnings estimates for 2024 revised up +38%, and the remaining 495 companies have had estimates collectively revised down -5%. The S&P’s earnings growth has been extremely narrow, and this year’s rally has been extremely narrow as well. In our last letter we reported on the “unprecedented concentration… the top eight companies make up more than 30% of the S&P 500.” To get over 30% today, you only need to count to six. Because the S&P 500 performance is so top-heavy, over the past two years the index has outperformed its average constituent by 23.3%.2 The last time this level of underperformance was recorded was 25 years ago, at the peak of the dot-com bubble. 2021: The Remix Our mental model of 2021 was the following. People had excess time and money because the pandemic confined them to their homes while they received generous government stimulus. People had watched other investors get rich as tech stocks and crypto soared with only minor interruptions for over a decade. Loose monetary policy and negligible interest rates discouraged saving and encouraged speculation. The last deep recession and financial bust hadn’t occurred since 2008 – too long ago to be salient. Risk seemed low and reward limitless. Greed became the dominant emotion in the investing calculus. This created the perfect conditions for a bubble. Our mental model for 2022 was that risk began to matter once again. Earnings disappointed, bringing projections for stratospheric growth down to earth. Positive interest rates created a real opportunity cost versus investing in assets with no prospect of generating near-term cash flows. The most speculative assets – most favored during the bubble, and most divorced from economic reality – cratered the most. This is the classic story of the boom-bust cycle. The presumption is that every investing generation needs to experience a bubble in order to properly discount investment risk. After a bubble pops, investors are chastened, become more skeptical of pie-in-the-sky projections, and pay more attention to valuation. Then, slowly but surely, memories of the bust fade over time. A new technology comes along that promises limitless growth. A decade of strong returns gets extrapolated indefinitely, and, a generation later, the cycle repeats. We believed that in the aftermath of the 2021 bubble, we’d see an era where rational analysis and healthy skepticism returned to prominence: The past decade has rewarded valuation-agnostic and meme-chasing investors, culminating in the unhinged growth stock mania that defined 2021. We think the next era will be marked by a return to sanity, rewarding disciplined, discerning and value-conscious investors – and we think that era has just begun. Yet, for some reason, investors were not chastened by the 2022 crash. The everything bubble in risk assets is back. Headline stock indexes have exceeded their 2021 highs, and valuations are near 2021 levels. Spreads on junk bonds are back down near post-financial crisis lows. Some of the most speculative assets – assets which lost investors hundreds of billions of dollars a mere two years ago – are resurgent. Cryptocurrencies have set new highs. Meme stocks and GameStop (GME) mania is back. Gambling on options expiring in less than a day runs rampant. Some very unlikely companies trade at bubble-like valuations: stodgy Costco (COST), for example, trades at nearly 50 times forward earnings, a valuation 50% higher than AI-darling Nvidia. The market has picked a few winners and run with them; returns to stocks with momentum are at all-time highs. Like much of the past decade plus, investors are once again enamored of growth stocks; indexes tracking value stocks have given back all relative gains from their short-lived resurgence in 2022. This reversal brings the relative performance of value stocks back near the record lows set at the 2000 market peak. We are surprised to find ourselves here again. What should our mental model for 2024 be? Is this in essence a form of bear market rally, a “dead cat bounce,” an echo of the 2021 bubble driven by AI enthusiasm, and the ultimate washout is imminent? This is our best guess, but there is an alternative: potentially, this is the beginning of a new, even more extreme, final wave of speculation. Were we to travel back in time, equities would have felt very frothy to us in 1998. Yet after a brief bear market, stocks continued climbing, reaching the most extreme valuations of all time before finally peaking in 2000. We can’t rule out a similar possibility today. We are balanced on an economic knife’s edge. If inflation reaccelerates, valuations will suffer. If the floor drops out of our deficit-spending-fueled economy, earnings will suffer. We expect stagflation to become a topic of conversation again at some point as inflation remains too high for a rate cut but economic momentum has been softening. However, if the current Goldilocks, not-too-hot, not-too-cold economy continues muddling along, the reckoning may come later rather than sooner. Regardless, we will continue to invest in a valuation-conscious manner, and trust that this strategy will eventually reap rewards, as it always has in the past. Turning points We’ve spent our careers as students of investor irrationality. We believe that markets are mostly efficient, punctuated by brief episodes of collective delusion that manifest as bubbles and panics. Collective delusion can occur on both the micro scale for individual assets, and on the macro scale for entire asset classes. Our Fundamental Value strategy seeks to exploit these rare opportunities: we attempt to identify situations where cognitive bias has caused investors to misvalue a security. This philosophy has served us well at Bireme over the past eight years. However, it does leave us vulnerable to looking foolish around extremes and turning points. We place bets when we identify delusion, but other market participants can always become even more delusional, leading to large paper losses for ourselves and our clients. Thus, when prices are most irrational – whether for the market as a whole, or for a particular security – we can look dramatically out of touch. Our worst periods of performance in the past have been when we were ultimately proven correct but acted too early. Our best periods of performance have been after we doubled down on a high-conviction theme or stock after prices moved against us. In the second half of 2021, as we furiously wrote our three-part “Everything Bubble” series and the market climbed day after day, we endured a six-month period with >20% underperformance vs the S&P. Our value longs did not keep pace with the soaring market. Our growth shorts climbed to even more untenable heights. People told investors like us, skeptical of the latest fads in digital assets and SPACs and electric vehicles, to “have fun staying poor.” Nevertheless, we stuck to our investment philosophy, doubling down on our convictions. When the house of cards came tumbling down in 2022, we outperformed the S&P by over 50%. Today feels eerily similar to 2021. We’ve endured a very disappointing start to 2024, with a similar >20% underperformance relative to the S&P. And, just like in 2021, we believe the opportunity set for the typical investor is near its nadir, while ours is near its zenith. Doubling down on differentiation We’ve always had a very high active share, generally holding 10-20 concentrated and idiosyncratic long positions and a varying number of short positions. This portfolio construction entails substantial basis risk, and therefore inevitable and uncomfortable periods of underperformance. This is a price we are happy to pay: the willingness to take basis risk is a necessary component of alpha generation. However, our basis risk has expanded considerably over time as the opportunity set has changed. For the years 2016 through 2020 our beta to the S&P 500 averaged 0.8 as Fundamental Value predominantly comprised cheap US-listed companies and we had little short exposure. From 2021 through 2023, our beta averaged 0.45 as we eschewed the speculative growth names that increasingly drove the index, and added substantially to our short book. Today, with valuations in the US grinding higher and international valuations languishing, finding opportunities here has become more and more difficult, and finding opportunities in other locales feels like shooting fish in a barrel. Roughly a third of our gross long is traded in the US, a third in Japan, and a third elsewhere. (We have much more to say about our newfound enthusiasm for Japanese equities below.) The combination of international longs and a robust short book has meant our beta to the S&P 500 has been a negligible 0.05 thus far in 2024. Until the opportunity set changes, our relative returns will be highly volatile. We view this as an asset. Our clients pay us to generate an idiosyncratic return stream. Furthermore, we believe investors will find long-term S&P returns extremely disappointing from these levels. However, it does make our life difficult. Clients become (rightly) concerned when relative performance lags significantly. We believe our job consists of two essential prongs: generating strong long-term returns through the full market cycle, and retaining capital through the full market cycle. Retaining capital is an often overlooked part of a manager’s job, but it is critical, as poorly timed entries and exits is the primary way investors impair their own long-term returns. Investors often flock to the hot fund or asset class and pull capital from the ones with poor trailing returns. But because markets are cyclical, this means investors often switch strategies at exactly the wrong time. A poignant illustration can be found in the experience of investors in the ARK Innovation ETF (ARKK). ARKK has enjoyed a respectable 8.5% annual return since inception in 2014. However, ARKK investors on a dollar basis have been decimated. ARKK became an investor darling during the 2021 growth stock bubble, with the share price tripling in less than a year. The portfolio manager, Cathie Wood, became a sensation, and attracted tens of billions of dollars in new capital: ARKK assets grew from $2b to $27b. Over the next year, ARKK (predictably) gave back all of its bubble-driven performance and then some, dropping over 80% from peak to trough on its swollen asset base. Thus, despite respectable full-cycle returns for the fund itself, ARKK investors have collectively lost billions of dollars. We take our duty to retain capital through the cycle very seriously. This is why we have poured our heart and soul into these letters since we founded Bireme Capital in 2016. Rather than relying on our exceptional returns to sell to new clients and retain existing ones, we encourage investor education, seek philosophical alignment, and thoroughly document our process and predictions. We hope we have earned some credibility over this time, and we hope to draw on that credibility today. We aim to both retain existing clients – and, hopefully, attract new ones – after periods of poor relative returns, because we believe prospective returns are strongest after relative drawdowns. This is the way to maximize returns on investor dollars, and to become a small but nevertheless countercyclical force in the market. If this philosophy speaks to you, please reach out today. Portfolio commentary Over the past decade we have followed Disney (DIS) with interest. It is a competitor to numerous stocks we’ve owned, including 21st Century Fox (which Disney purchased in 2019), Comcast (CMCSA) and Netflix (NFLX). We’ve always been impressed with their IP, and therefore were a bit surprised by the company’s underperformance over the last few years. Adjusted operating income declined from nearly $16b pre-pandemic to less than $13b in 2023, and the stock dropped by more than 50% from its 2021 peak. Disney’s once-proud linear networks are now mired in secular decline. Its once-heralded streaming services have yet to turn a profit. Disney has faced numerous proxy battles with disgruntled shareholders. The firm has been trashed in the media, with headlines like “[CEO] Iger found Disney in worse shape than he expected.” It was also the near-unanimous pick for “Biggest Business Loser of 2023” from the hosts of the popular All-In podcast. Despite the headlines, we see a company with a tremendous business today, and a promise of more growth to come. We believe Disney is undervalued because investors have fallen prey to availability bias: investors have focused on negative news headlines and challenges to prominent business lines rather than impartially evaluating the totality of the enterprise relative to its valuation. We think that at Disney’s current valuation, earnings at the Experiences segment can justify the entire market cap virtually by itself. Investors are getting the rest of the business – including Disney’s inimitable IP, growing streaming services nearing profitability, and shrinking but still profitable linear networks – at a steep discount. Disney’s most profitable segment is Experiences, predominantly parks, resorts and cruises. Attendance, pricing, and margins have all grown consistently over the years, and in FY 2023 this business did $7b in operating income. This is up from $1b in 2004, which is a >10% CAGR. Very few businesses can sustain this sort of growth rate over 20 years and at this scale. This speaks to the unique nature of Disney’s parks, which integrate the world’s greatest entertainment IP with iconic rides and experiences. There is little direct competition. The beauty is that they still have room to grow. Just in the last few months they added a “Zootopia” land and a “World of Frozen” land at the Shanghai and Hong Kong parks, respectively. Many more additions are planned over the next decade, partially filling the 1,000 acres the company owns adjacent to their current parks. As they put it in apress release, “Disney will explore even more characters and franchises, including some that haven’t been leveraged extensively to date, as it embarks on a new period of significant growth domestically and internationally in its parks and resorts.” While their plans will consume capital – projected at $60b over the next ten years – we expect Disney to generate attractive returns on this investment, continuing to grow profits in the parks business at a 10% annual clip. By 2030, we expect the Experiences segment, which also includes consumer products, to generate $18b in annual EBIT, up from $9b in 2023. The vast majority of Disney’s other revenue stems from the monetization of original video content: movies, TV shows, and sports broadcasting. Historically, Disney’s linear TV networks generated much of this revenue. But linear networks are now in decline as the world moves towards a streaming-first model. This has created upheaval at Disney, with its cable channels losing subscribers and cash-cow ESPN seeing a material decrease in profitability. At the same time, Disney has attempted to unhitch itself from the doomed prospects of linear by investing heavily in streaming. Disney was late to the streaming game, launching their flagship Disney+ service a full 12 years after Netflix began streaming online. But the product is popular: Disney+ has 118m subscribers worldwide as of the end of Q1. At current run rates, it generates $10.3b in annual revenues. To date, Disney’s streaming efforts (which also includes Hulu and ESPN+) have not been profitable. For a while this was accepted by investors, as streaming was seen as a land grab with a very large pool of potential subscribers and profits down the road. And in the heady days of 2018 through 2021, few investors cared if your business was profitable if you were growing quickly. Disney prioritized rapid expansion of its streaming business, disregarding profitability in the process. However, we have entered a new era. Netflix, Disney, and the other streamers are now laser-focused on margins, with Netflix guiding to record profit margins of 24% in 2024. Disney has pushed through large price increases in the ad-free Disney+ product, and forecasted a multi-billion dollar decline in content investment in 2024 as they focus on quality over quantity. While this combination might sound risky, we think that Disney’s evergreen content and still-attractive pricing – $8/mo for ad-supported and $14/mo for ad-free in the US – will continue to retain old customers and attract new ones. Other avenues for growth include growing its ad-supported tier and reducing password sharing. Furthermore, we think Disney has a chance to greatly improve its DTC economics by bundling its disparate DTC services. Though the content bundle distributed by cable is dying a slow death, the bundling value proposition remains extremely attractive for consumers and producers alike. Bundling maximizes appeal and revenue, and reduces churn. Disney is uniquely positioned to recreate their own in-house version of the cable bundle. Disney+ has inimitable specialty IP, including Disney Animation, Pixar, Star Wars, and Marvel. Hulu, soon to be wholly owned by Disney, has a wide selection of general entertainment content. In 2025, Disney will launch a flagship ESPN streaming service with ESPN’s full suite of content. With this content mix, Disney can create a compelling bundled offering for an enormous swath of consumers. Advertisers will love the one-stop shop for a large and diverse audience. We think this bundle will become an integral part of the entertainment package for hundreds of millions of households around the world. Fundamentally, we believe that Disney’s content is extremely valuable. They have not been able to monetize this content effectively in a streaming-first world. Instead of profits, their valuable content has been generating huge losses, which has artificially depressed their earnings. We trust that with a newfound focus on profitability and an emphasis on rebundling, Disney will be able to find a revenue model that rewards them appropriately. Disney expects its combined streaming businesses to reach profitability in the third quarter and become a meaningful earnings growth driver from there on out. We anticipate Disney eventually generates at least 15% margins in its DTC business, swinging from a $2.5b operating loss in 2023 to a substantial profit within a few years. The combination of losses in streaming, declines in cable subscribers, and escalating sports rights pricing has resulted in a significant decline in Disney’s profitability. However, with the Experiences segment alone justifying most of the current enterprise value, investors can acquire the rest of the business at a steep discount. We believe that DTC will generate strong earnings within a few years. The Sports and Linear Networks segments, though secularly challenged, will continue to generate substantial income in the near term, which is an added bonus. We made a material investment in Disney in Q1 and today it is one of our largest positions. Short positions It has been a rough year for our short book, with the positions costing -700bps of performance through the end of May. This was driven by a general rise in speculative stocks, including anything related to AI, but exacerbated by large and unacceptable losses in the meme stocks DJT and GME. This wound is all the more painful because it was entirely self-inflicted. Early in 2024, we determined to begin exiting the business of shorting stocks completely divorced from economic reality. First of all, as we discussed in the Market Commentary section above, it was becoming increasingly clear to us that we were wrong in our assumption that investors had learned their lesson from the 2022 washout of the most speculative securities. Surprisingly, gambling on securities with transparently irrational prices was coming back into vogue. Second, we had become less convinced that these particular short bets were worth the volatility, the sleepless nights and the buy-in risk, even if they were positive expected value. They consumed an enormous amount of our time and attention, disproportionate to the potential for gain. Third, we were finding many new and attractive opportunities on the short side that were overvalued but didn’t seem to have as much meme or short-squeeze risk. Their valuations implied, we thought, unrealistic expectations relative to their business prospects, but, crucially, buyers were legitimately convinced of their economic value. This grounds their stock prices in some plausible reality. Unlike meme stocks, these companies aren’t essentially worthless, which limits our potential profit. But we feel confident that our longs will outperform over the long term relative to our new short positions like Apple (AAPL) and Costco, which are growing profits slower than many of our longs but trade at multiples of the valuation. And we are vanishingly unlikely to get bought in in the interim. These short positions allows us to comfortably take more risk in our long book (where we expect to make the vast majority of our returns) with less concern about market drawdowns, and hopefully generate some absolute return as well. Thus, we began the process of switching out our legacy short book from the 2021 bubble names – SPACs, EV manufacturers, cryptocurrency miners, and meme stocks – for new, more conservative shorts. However, before we had completed this transition, we were caught in several small legacy short positions that rapidly became large ones. The first culprit was Digital World Acquisition Corp (DWAC). DWAC, a Special Purpose Acquisition Company (SPAC), had no business operations prior to Monday, March 25th. On that day, the SPAC completed its merger with Trump Media and Technology Group Corp (“TMTG”) and began trading as “DJT” the next day. This triggered a speculative run-up, with the stock spiking from less than $20 per share pre-merger to an intraday high of nearly $80, a $14b market cap. This move was not due to the business prospects of the company. The sole operating business of TMTG is Truth Social, a social media network majority owned by Donald Trump, built after he was kicked off Twitter and Facebook for his involvement in the events of January 6th 2021. In its first full quarter post-merger, DJT reported grim numbers: nearly $100m in losses on less than $1m in revenue. DJT doesn’t even report typical key performance indicators like active users or ad pricing because divulging that data “might not align with the best interests of TMTG or its stockholders” (i.e., those numbers would look comically low). Estimates suggest Truth Social has under 100,000 daily active users, and that number is falling. This is hardly a business that can support a multi-billion dollar market cap. But rather than trade on its own dismal economic prospects, DJT seems to trade as a token of support for Donald Trump. There is, sadly, no “correct” price for such signaling. DJT will almost certainly be bankrupt and delisted in a few years. Before that happens, Trump will potentially be able to extract billions of dollars from credulous retail investors. Trump’s lockup expires on September 25th. At current prices, his stake is worth as much as $3.5b. This would not be the first time Trump has extracted a windfall from a soon-to-be-defunct company with the ticker DJT. Trump previously took his Trump Hotels and Casino Resorts company public in 1995. The original DJT lost money every year of its existence. It went bankrupt in 2004 after losing $600m, reemerged from bankruptcy, and promptly lost another $2b before filing for bankruptcy again in 2009. Despite losing billions for investors, Trump managed to take home tens of millions of dollars in salary, bonuses and options. Trump himself said, “The money I took out of there was incredible.” It is a travesty that history is repeating itself, this time on a much larger scale, with even more bleak business prospects. As they say, the market can remain irrational longer than you can stay solvent. We ended up covering at around $30 per share. Our second costly mistake was in GameStop. We entered May with a small and manageable (we thought) short position in Gamestop. Our rationale was simple: the stock is almost certainly going to zero. While the company generated $5.2b in revenue last year, gross profits fell for the second year in a row and are now 50% below 2018 levels. The company had negative operating income, burned over $200m of cash, and has no legitimate path to profits. None of this stopped an armada of retail investors from pushing the stock from $10 to $70 the first week of May. This transformed our “reasonable” short position into a high-single digit percentage of NAV, something which was clearly not acceptable. We covered at around $55 per share. Unfortunately, again, this crystalized material losses. Frustratingly, we remain as certain as ever that these stocks are going to zero. Unfortunately, we have to allow for the possibility that the irrational gamification of our capital markets might be a long-term feature (read: bug). Strictly speaking, there is nothing to stop investors from treating a stock like “an abstract vehicle for gambling” rather than a stream of discounted cash flows. Of course, companies can and will sell stock to credulous investors; AMC’s operating activities have incinerated more than $2.5b since 2020, but they’ve been able to stay solvent by selling shares to credulous retail investors, raising more than $2.8b. But as long as investors are willing to continue to donate funds to unprofitable companies, the game can continue indefinitely. This situation has brought us great pain. There is economic pain; these are substantial losses. There is emotional and reputational pain; it pains us to report these losses to our clients who have entrusted us with their hard-earned wealth. It is a stupid way to lose money. But we played a stupid game, and we should not be surprised that we experienced stupid results. And then there is philosophical pain. We feel a sense of something approaching moral obligation to take the other side of such obvious irrationality. The financial rewards for being a successful value investor are substantial, and can seem and feel divorced from the economic value our actions add to the world. Our public service is to do what little we can to bring prices in line with reality. With both our trading and our writing, we hope to do our small part to smooth out excessive fluctuations in market prices. Bubble valuations are not a victimless crime. Misled investors can and often do lose their life savings in bubbles. High and unrealistic valuations encourage capital to flock to an industry and discourage scrutiny of poorly thought out investment ideas; if the implied cash flows never materialize, scarce capital is wasted. For example, billions have been raised and promptly lost by the many Tesla (TSLA) copycats. EV manufacturer startups who have experienced near total losses include (but are not limited to) Nikola (NKLA), whose founder is now in jail for fraud, and Fisker (OTC:FSRNQ), which filed for bankruptcy this week. Short sellers bring a level of scrutiny and sobriety of debate to an arena otherwise dominated by promoters and shills. But the practice of short selling is in dire straits. Jim Chanos, arguably the most famous short seller of all time, closed his hedge fund last year after being unable to attract capital. The short-bias hedge fund index from HFR had 54 constituents in 2008, and now has a mere 14. The median short interest in S&P 500 companies is at a rock-bottom 1.7%, a level only previously seen in 2001. Markets are cyclical, and a nadir in literal and figurative short interest, in our minds, can only mean one thing: the prospects for an intelligent short seller have never been better. Rest assured, our short book is robust, and we will continue to short investor darlings. However, our short book will be composed of more conservative names in the future: low or moderate short interest, larger market capitalization, and tethered to some sense of reality. For example, we recently put on a short position in Cintas Corp (CTAS), a manufacturer of corporate uniforms which has grown revenues at a mid-single-digit CAGR for a long period of time. While Cintas is a perfectly decent business, including 20% EBIT margins, the business trades for more than 7x EV to sales and 35x EBIT. This valuation is more appropriate for a fast-growing software company, not a moderate-growth seller of corporate uniforms. We are confident that shorts like this will generate substantial alpha versus our long book. We’re very excited to report on our new, sizable position in Japanese equities. We think Japan as a whole presents the most attractive opportunity set we’ve ever seen for value investors, and we’ve made investments in a handful of excellent businesses trading at steep discounts to Western peers. Thirty years of zero nominal returns to equities and poor corporate governance has masked the underlying strength of the Japanese economy and the positive changes being made to inefficient business practices. Because we don’t want this important idea to get buried at the bottom of this already quite long letter, we have broken off that piece to send separately next week. Please look out for “Japan: Anchoring Bias Writ Large.” We are grateful for your business and your trust, and a special thank you to those who have referred friends and family. There is no greater compliment. Bireme Capital Follow our content by subscribing here. Footnotes 1 FV performance is shown net of a 1% management fee and 10% performance fee. Available for Qualified Clients only as SEC rules do not permit performance fees for nonqualified investors. Fee structures and returns vary between clients. FV inception was 6/14/2016. 2 S&P 500 Index Total Return minus S&P 500 Equal Weight Index Total Return. Advisory fees and other important disclosures are described in Part 2 of Bireme’s Form ADV. Reported performance is a dollar-weighted average of the securities in the Fundamental Value L/S Model Portfolio maintained at Interactive Brokers from inception through October 2023. From November 2023 onward, reported performance is a dollar-weighted average of the performance of all client accounts invested solely in the Fundamental Value L/S strategy with no client-directed customizations to the portfolio composition. Performance is shown net of a 1% management fee and 10% performance fee. Available for Qualified Clients only as SEC rules do not permit performance fees for nonqualified investors. Past performance is not indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. The SPY ETF seeks to track the performance of the S&P 500 Index, and the performance described includes both fees and the reinvestment of dividends and other distributions. Registration does not constitute an endorsement of the firm, nor does it indicate that the advisor has attained a particular level of skill. See Disclaimer for important disclosures. Sources: Bloomberg Finance LP, Interactive Brokers LLC, S&P Compustat, Bireme Capital LLC.
Click to enlarge Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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