Q2 2023 Investor Letter
Fellow Investors,
Kingdom Capital Advisors (KCA Value Composite) returned 2.73% net of fees in the second quarter, vs. 5.21% for the Russell 2000 TR, 8.74% for the S&P 500 TR, and 15.39% for the NASDAQ 100 TR. The KCA Value Composite returned 31.36% net of fees since inception on January 13, 2022, or 42.64% cumulative outperformance when measured against the Russell 2000 TR.
Reporting returns that lag the indices is unpleasant and we hope the strong reversal experienced by some of our positions at the beginning of July allows for a rosier report at the end of Q3. Small cap stocks remained out of favor in the second quarter, with the Dow, Nasdaq, and S&P again outperforming the Russell 2000. Our top contributors to Q2 returns were Unit Corporation (UNTC) and A-Mark Precious Metals (AMRK), while Arch Resources (ARCH) and Valhi (VHI) were our largest detractors.
Positioning Updates
In our last update, we highlighted our heavy allocation to A-Mark Precious Metals (AMRK) and expectations for their upcoming earnings release. A-Mark delivered another strong quarter of profitability and was able to capitalize on increased demand for their bullion products during the weeks following the regional banking turmoil. The biggest surprise from A-Mark's earnings release was their recent pivot to repurchasing shares. The company has been authorized to make buybacks since 2018 but first used their authorization in February 2023 at $29/share. This is particularly noteworthy given this allocation decision was made before the bank runs re-accelerated demand.
We expect this decision highlights multiple important shifts for the business:
Establishes a “floor” price where the company views buybacks favorably. Given recent acquisitions at 1-2x EBITDA, the bar for allocating capital to buybacks is very high.
Represents a maturing of their business plan, given their numerous entries into niches of the precious metals market. Going forward, we expect sufficient free cash flow to be available to fund the ongoing dividend, buybacks, and accretive acquisitions.
A-Mark continues to trade at a low multiple of cash flow while leading their industry. A-Mark maintains superior access to product, and they were the only platform we track which didn’t increase size limits on customer orders during the March/April surge in bullion demand. We view this as further validation of their business model being ideally suited to continue dominating the DTC bullion market.
Energy Positions
Last quarter, we provided a perspective on Unit Corporation, Arch Resources, and Pardee Resources given the material price declines in energy. While Unit certainly rewarded our patience in Q2 and Pardee remains a sleepy but steady source of dividends, Arch has continued to struggle given a variety of headwinds. It feels a bit silly to be worried about a company that is still expected to earn over $50 a share between 2023 and 2024 and trades for $115, but that’s just how far out of favor the coal sector has fallen. We continue to expect significant outperformance among coal stocks once the broader market realizes how the global cost curve has increased. In the short term, these stocks will continue to fluctuate on fears about China, recessions, seasonality, and whatever other excuses can be formed to dissuade investment in a sector that has long been hated.
Increasing Retail Exposure
Entering Q3, we have increased our exposure to multiple consumer businesses that appear significantly mispriced. A couple examples below:
The Children’s Place (PLCE): As the name implies, PLCE sells Children’s apparel through their store network, website, and via Amazon. While the business was mostly left for dead after cotton and freight costs pummeled them in 2022, these headwinds have abated. PLCE expects to earn around $5/share in just the second half of 2023 after these pressures subside, and trades for less than $30. For a business that consistently generated $100m+ of cash flow before Covid disruptions, I don’t see enough evidence that their model is permanently impaired. PLCE made significant digital investments before Covid and drove over half their sales online. Even in a recession, PLCE grew sales in 2008 and only saw an average 2% decline in same-store sales in 2009. Spending on children is less discretionary than other economic sectors and PLCE seems well-positioned to thrive in a normalized environment.
Superior Industries (SUP): If you’ve tried to buy a car in the past 3 years, you have a pretty good idea about the lag in auto production since Covid. US inventories are at historic lows and production remains well behind 2019 levels. Despite this, wheel manufacturer SUP is generating cash flow and has improved sales margins. SUP appears to have made significant inroads on electric vehicle sales - fortunately for them EVs still need wheels! The biggest drag on SUP has been a complicated capital structure, and with that set to simplify in the next two years, we believe their value will become more apparent to the broader market.
Business Update
We continue to seek out patient investors interested in our actively managed small-cap strategy. We would welcome any referrals you deem appropriate.
In Q2 we continued posting our work to Seeking Alpha, publishing writeups on Alto Ingredients, Corsa Coal, A-Mark, Good Times Restaurants, and CAVA Group. I appeared on Michael Gayed’s Lead-Lag Live podcast and published another guest article in the Oddball Stocks Newsletter covering Valhi.
We appreciate you entrusting us with your investment in a volatile environment. Mike and I have invested most of our net worth with Kingdom Capital and we’ll continue to steward your capital as we do our own.
Sincerely,
David Bastian
Chief Investment Officer
DISCLOSURES
This document is not an offer to invest with Kingdom Capital Advisors, LLC (“KCA” or the “firm”).
The statements of the investment objectives are statements of objectives only. They are not projections of expected performance nor guarantees of anticipated investment results. Actual performance and results may vary substantially from the stated objectives. Performance returns are calculated by Morningstar.
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Positions reflected in this letter do not represent all of the positions held, purchased, and/or sold, and may represent a small percentage of holdings and/or activity.
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