Q4 2023 Investor Letter
Fellow Investors,
From the bottom of my heart, thank you for the role you have played in making my dream of launching an investment firm a reality. I wanted to start by sharing the lyrics to a song that reminds me how lucky I am to be doing what I love – “The Men That Drive Me Places,” by Ben Rector:
Danny showed up early, fifteen minutes till five thirty
Making sure that I'd be on my morning flight
He said he'd love to fix computers, but that he can't until he's fluent
So he spends his driving money taking class at night
He wore a neatly ironed dress shirt, and he helps his kids with homework
Deep inside I couldn't help but ask myself
Why that at night I'm up on stage, everybody knows my name
While Danny's early picking up somebody else
Oh, isn't that just the way it goes
You're dealt a good hand, and you get celebrated
Oh, how am I the only one who knows
I'm half the man of the men that drive me places
One of the greatest privileges of this job is to help create wealth for those that have enabled me on this endeavor. It’s also humbling to recognize how many of you have trusted me with your hard-earned capital to do what I love. We don’t all get that chance, and I know some of you are hustling to get to something else. I sincerely hope to be part of helping you achieve those goals with our fund. Thank you. I have indeed been dealt a good hand, and I will continue to play it the best that I can.
Kingdom Capital Advisors (KCA Value Composite) returned 5.35% (net of fees) in the fourth quarter, vs. 14.03% for the Russell 2000 TR, 11.69% for the S&P 500 TR, and 14.60% for the NASDAQ 100 TR. The KCA Value Composite returned 34.02% (net of fees) in Calendar Year 2023, or 17.09% outperformance measured against the Russell 2000 TR.
While Q4 returns were solidly positive, we faced two significant headwinds - weak Q3 reports from Corsa Coal (CRSXF) and The Children’s Place (PLCE). Our top contributors to Q4 returns were Unit Corporation (UNTC), Abacus Life (ABL & ABLLW), and ComScore (SCOR), while Corsa Coal was our largest detractor.
2023 Wrap-Up
For the full year, Unit Corporation was the largest contributor to our performance, while Arch Resources (ARCH) was the largest detractor. This is a bit misleading, as we rotated our holding of Arch into Warrior Met Coal (HCC) over the summer, which provided a solid positive contribution in the second half of the year.
You may have noticed a significant amount of trading in your account during 2023. This is sometimes attributable to our decision to slowly average into a new position, or slowly reduce exposure. Other times, the changes can be more significant, like our rotation into Warrior from Arch. To sense-check that our active trading approach was worthwhile, I reviewed the stock positions we held on 12/31/22 and calculated the performance had we simply held them and collected the dividends. (I ignored a few small options positions that were set to expire during the year, which had negligible performance impact.)
What was the result? Our total return for the year would have finished near 10% if we went on a 365-day vacation. Fortunately, the effort we put in added a lot of value, as you can see above. Two specific decisions I would like to focus on: our increased allocations during the year to A-Mark Precious Metals (AMRK) in March at ~$28 and Unit Corporation in July/August at ~$47. For each security, these moments represented clear opportunities where market price had decoupled from fundamental tailwinds and we were able to exploit the mispricing. These are the rare opportunities we continue to hunt for as we roll into 2024.
Positioning Updates
A lot has changed in our portfolio in the past three months, and for the first time since we launched we no longer hold positions in A-Mark or Unit Corporation. I’m not done with either investment, but they both reached inflection points where we don’t see much short-term upside compared to some significant near-term headwinds. Given how much we’ve discussed each, I wanted to spend a bit of time covering our rationale:
Regarding Unit, commodity prices have been hammered over the past few months, with the forward curve for gas and oil looking about as unattractive as they have since we launched our fund. Unit begins 2024 unhedged, which will be a nice tailwind compared to 2023, but not what we’d hoped. Additionally, their recent sale of acreage in the Texas Panhandle is not fully quantified. We are cautious that Q1-24 earnings, along with selling from recent dividend recipients, could put significant pressure on the share price. In the absence of a recovery in commodity prices, fair value for their remaining assets isn’t far enough above the current share price for us to remain invested.
A-Mark posted Q1 earnings in November, missing analyst estimates and briefly crashing their share price. However, this was met with Management’s strongest showing of shareholder support to date, including an aggressive use of the buyback for the remainder of the quarter. That support is now gone until they report Q2 earnings in February, and street estimates appear far too high compared to Q2 website traffic and premiums. We expect we will get a chance to buy our shares back at lower prices in the coming months.
Beyond the high-level turnover, many of the underlying aspects remain the same. We still have core positions in names like The Children’s Place, Abacus Life, and Warrior Met Coal, which I’ve discussed previously, and smaller special-situation investments like CKX Lands. And our goal remains the same – finding opportunities where we think the market is mispricing values.
We enter 2024 in a very different place than 2023. The broader market trades at a much higher level than it did twelve months ago, interest rate cuts are “closer,” and inflation has cooled off for now. We are firm believers that there’s always opportunities in the market, even at highs, and we think we’ve found quite a few that haven’t recovered nearly as much as would be justified in the current environment. We buy stocks, not the broader market.
New Positions
There’s been one major new addition to the portfolio, so I want to outline why we are, yet again, going dumpster diving in a hated sector:
Net Lease Office Properties (NLOP): I spent most of 2023 adamant that I was going to avoid the Office Real Estate Investment Trust (“REIT”) trade. I still don’t feel great about the space over the long-term, but that’s of little relevance for this trade. NLOP represents the remainder of W. P. Carey’s former office holdings. After Covid, most REITs rushed to divest this out-of-favor sector, and after selling some locations, W. P. Carey spun the rest into this new NLOP entity. Given the spin was small, taxable, and generally undesired, the price of the shares tanked after it was completed. I pulled up their lease portfolio and started running through the holdings, and soon realized that you could probably justify the current valuation if they never leased a new space again and sold vacant locations at fire-sale prices. But the locations aren’t as bad as you would expect – their second largest property is a 16-year lease with FedEx. The locations were 97% occupied at the time of the spin, with most tenants being investment grade. Their highest-profile vacancy is in the process of being rezoned as a liquor distribution center, and they got the prior tenant to extend two other leases for 10 years as part of the vacating process. I think investors will be pleasantly surprised as locations are liquidated in the coming months.
Business Update
In Q3 we continued posting our work to Seeking Alpha, publishing writeups on Barnes & Noble Education, Children’s Place, and Abacus Life. I really enjoyed appearing on Bobby Kraft’s Planet Microcap podcast to discuss some of the opportunities we’re seeing in the market today. Mike and I are gearing up for a new year, which will include me attending the ICR Conference in Orlando, January 8-10, to reconnaissance some new investment opportunities.
Sincerely,
David Bastian
Chief Investment Officer
DISCLOSURES
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