It is hard to believe it has been a little over one year since the COVID-19 pandemic started. Some days it feels like we have all lived two or three years. But as we lap the one-year anniversary of COVID our thinking begins to shift from “how do our companies navigate and survive COVID” to “how will the future be different? What’s transient and what’s permanent?”.
We are applying these questions across our entire portfolio – both private and public. In most cases the answer is, business as usual, and with some there will be small changes around the edges. In other cases, we see permanent changes.
The most striking outcome of COVID has been the stark gap between success and stress in so many industries. For example, UPS and FedEx have seen a surge in delivery volume from e-commerce, LabCorp a similar surge from COVID testing, and Zillow a beneficiary of the migration driven by the work from home option. Other holdings such as Disney experienced immediate and painful decline(s) in its Parks and Studio segments. However, the company quickly adapted and accelerated the roll out of its streaming Disney Plus offering. Today, Disney’s stock sits just below all-time highs.
Against the backdrop of a COVID recovery is an equity market that has produced some wild activity during Q1 2021. Investors witnessed increasing levels of trading activity, increased levels of speculation, and a surge in new market participants as evidenced by custodians reporting a sizable increase in new account openings. Margin debt has increased to a multi-decade high, stocks such as GameStop and its biggest supporter “Roaring Kitty”, further added to the speculative climate. All this ultimately gave way late in Q1 2021 to the SPAC frenzy, which unfortunately for its participants is now feeling the downside of the speculative frenzy.
While all the above make for interesting news headlines we view these events as a bump in the road of long-term ownership. Fads will come and go, but we continue to believe that owning a portfolio of high quality and well managed investments will ultimately delivery attractive long-term returns.
While our portfolio continues to deliver steady results, we are watching for outcomes that could slow or derail the COVID recovery. High at the top of the list is inflation, and especially labor inflation. The Federal Reserve Bank (FRB) has been clear that its playbook includes a Chapter titled “What We’ll Do When Inflation Increases.” Without spoiling the ending too much, it results in a reversal of the highly accommodative monetary policy in place today and an increase in interest rates. The inflation debate becomes even more tricky because the FRB indicated they would most likely only act in the presence of a permanent shift to higher inflation, as opposed to inflation they view as transitory. When, or if, this happens is unknown and very much out of our control. Our best defense continues to be holding a portfolio of high-quality companies and trusting that the management team will pen the chapter titled “How I Successfully Survived A Change in Monetary Policy.”
The strong investment performance from 2020 continued in Q1 2021 with our average equity portfolio generating a +9.8% return.
As mentioned above we sat out and took a hard pass on the SPAC, Bitcoin and GameStop mania and continued to focus on high quality companies that we believe can grow and compound capital over a long period of time. Across our portfolio we have seen the market reward durability and strong execution in the face of COVID. Examples of this include our holdings in Disney, Google, Charles Schwab, FedEx and Otis.
With the broad market indexes at all-time highs, we continue to work on a handful of new opportunities. As in the past with the market at new highs, our pipeline tends to thin out. It is not to say the well is dry, just a little less water than normal. With that said, we remain committed to our disciplined process and continue forward with our discovery and due diligence.
During Q1 2021 we added positions in View Inc (VIEW), Good RX (GDRX) and sold Camping World (CWH).
View, Inc (VIEW) / Market Cap: $2 billion)
VIEW develops and sells eco-friendly exterior glass for use primarily in commercial buildings. Marketed as “dynamic glass”, its innovation is a built-in electronically controlled tint/shading process to reduce sunlight and glare and help control indoor temperatures. It consists of glass with an electrochromic coating and layers of ceramic metal oxide, which, when a low voltage charge is activated across the windowpane creates a tint that can be controlled manually by an app, or with AI software algorithms.
VIEW’s glass sells at a premium to other eco-friendly glass such as low-e (emission) glass commonly used in new construction. The ROI from dynamic glass comes from long-term energy savings and construction savings associated with the cost of HVAC systems, blinds and shades. Reduced glare and clear outdoor views have also been shown to improve the perceived quality and rent potential of commercial buildings along with well-being benefits such as reduced stress for office workers and recovery time for hospital patients.
The company’s markets are still early-stage with revenues growing rapidly from a small base with a substantial order backlog and an even larger sales pipeline. Currently, the company has a very large share of a small market for premium glass, but its addressable market consists of the $150 billion spent annually on glass for new construction plus potential building retrofits. The ability of VIEW’s glass to meaningfully reduce energy use in buildings – which is greater than vehicle energy use – should provide a long tail for demand as regulators and enterprises focus on meeting carbon reduction goals.
GoodRx Holdings (GDRX) / Market Cap: $16 billion)
GoodRx operates a website and app platform that provides coupons, discounts and comparison shopping for drug purchases that occur at US pharmacies. The company has built an extensive back-end operating system which tracks and updates drug pricing in real-time for individual prescription drugs at more than 70,000 local US pharmacies, which aggregates to over 200 billion prices daily.
Pharmacy Benefit Managers (PBM’s) that contract to supply pharmacies assess pharmacies a fee whenever a consumer uses a GDRX discount code, and a portion of that fee is shared with GDRX. On average, the company receives nearly 15% of the purchase price from PBMs when its discount codes are used, and consumers receive greater discounts. GDRX directs consumers to discounts for generics that average 90%-off pharmacy cash prices, and it began a partnership several years ago that provides 35%-off for many branded drugs. The GoodRx app is the leading consumer healthcare app for smartphones – approaching 5 million active monthly users, but still has penetrated just 1-2% of the prescription drug market.
The company completed its IPO last year with the objective of acquiring more customers and leveraging its user base by introducing additional services such as premium subscription-based discounts, telehealth and other healthcare offerings. Its business is highly profitable with EBITDA margins near 40%, minimal capex and highly scalable systems.
Fixed Income Update
Our fixed income portfolios continued with steady returns in Q1 2021 generating a positive +1.8%. On the surface these returns seem quite pedestrian. However, we consider them to be attractive given the rapid rise in rates during the quarter that resulted in most fixed income returns being negative.
Generally, we remain in pause mode until the fixed income environment once again offers us attractive opportunities.
We completed two new real estate investment in Q1 2021. One mixed-use development in Atlanta and an office investment in Sunrise, Florida.
Our pipeline continues to fill up and we are seeing increased opportunities that meet our underwriting criteria. We passed on the multi-family opportunity in Boise Idaho and are moving ahead with the grocery center re-development in Sacramento and are still in due diligence with the ground up hotel development. As these progresses, we will share updates with you.
A more detailed description and update can be found in the “Real Estate Update” included with this letter.
We did not make any new private equity investment in Q1 2021.
As the economy has slowly come back to life our private equity pipeline has refilled. We continue to evaluate the two Quick Service Restaurant (QSR) opportunities mentioned last quarter and are re-underwriting our grocery store investment due to new information learned near the conclusion of due diligence.
A detailed update on our current holdings can be found in the “Private Equity Update” included with this letter.
Our public equity pipeline is active, but lower than normal, mostly because of higher valuations driven by the steep and quick COVID recovery. The benefit of our multi asset class approach is that we have many avenues to deploy capital, which is valuable especially when one area offers fewer opportunities. Our private equity pipeline remains robust, and we are seeing equally attractive opportunities in real estate. I look forward to updating you on our progress with these opportunities.
As a firm we are required to provide certain disclosure information to each of our clients on an annual basis. Pursuant to meeting our disclosure requirements, the purpose of this communication is to notify you of any material changes to our Form ADV Part 2A Disclosure Brochure (“Disclosure Brochure”) since the last annual update of that Disclosure Brochure and to notify you that a complete copy of our Disclosure Brochure is available upon request. If you would like a current copy of the Disclosure Brochure, you may contact us at [email protected] or at telephone number 858-457-7544 ext. 210. Please note that you may obtain information about our firm and our individual investment adviser representatives at the Investment Adviser Public Disclosure (IAPD) website address (http://www.adviserinfo.sec.gov/). The Disclosure Brochure provides information about our firm, including a description of our programs, fees, conflicts of interests, and other business activities. We last provided you with a copy of our Disclosure Brochure January 2020.