Q3 2023 Investor Letter
Fellow Investors,
Kingdom Capital Advisors (KCA Value Composite) returned 18.19% net of fees in the third quarter, vs. -5.13% for the Russell 2000 TR, -3.27% for the S&P 500 TR, and -2.86% for the NASDAQ 100 TR. The KCA Value Composite returned 27.21% net of fees Year-to-Date through September, or 24.67% outperformance measured against the Russell 2000 TR.
I noted last quarter we were hoping for “a rosier report at the end of Q3” and performance certainly improved. Despite small cap stocks (Russell 2000) continuing to underperform the larger indices (Dow, Nasdaq, and S&P), several of our holdings excelled. Our top contributors to Q3 returns were Corsa Coal (CRSXF), Unit Corporation (UNTC) and Seneca Foods (SENEA), while Superior Industries (SUP) was our largest detractor.
Positioning Updates
Little changed for our portfolio in the third quarter beyond a positive sentiment shift for several of our holdings. For example, we’ve owned Corsa Coal since last year, increasing our stake after their November 2022 report revealed attractive 2023 contracts and again in March this year when they settled their Department of Justice suit for a mere $1.2m. However, the stock price failed to credit these positive developments until this quarter, as operating results finally reflected the improved conditions which were known for months. The story improved in August when Corsa announced a settlement in a case they filed against the Pennsylvania Department of Transportation (PennDOT). Corsa will receive over $23M from PennDOT, about half their market capitalization at the time of announcement. The corresponding increase in Corsa’s valuation has been less significant, despite our belief that this dramatically reduces one of the main investment risks – balance sheet liquidity. Time will tell if, when, and how the market will assign credit for their improved financial condition.
Similarly, The Children’s Place has fluctuated between $14 and $31/share since May, despite maintaining expectations to earn over $5/share in the second half of 2023 and reiterating their cash flow targets set at the beginning of the year. The company has a long history of generating cash and is recovering from Covid shutdowns and supply chain disruptions that stunted their most recent results. We don’t expect to frequently find companies with such a steady operating history trading for only a few times their normal earnings power but are happy when we do. The most difficult part of finding inefficiencies in public markets is having the patience to see if the market will agree with your assessment.
We ended Q3 with about 15% of our account balances in cash, and we are in the process of rotating out of some prior holdings into new ideas. We entered Seneca (SENEA) this quarter after forced index selling tanked the otherwise sleepy stock and exited after a 50% gain. While some vocal shareholders believe this is the beginning of a much larger move, we have some concerns about the business’s ability to generate meaningful cash to pay down debt. In either event, it was nice to own something that quickly responded to perceived undervaluation.
Q3 returns continued to strongly benefit from our coal positions. Seasonal weakness in metallurgical coal prices ended in August and indexes rose over 30% in a month. As best we can tell, demand for the key steelmaking component continues to increase while no significant supply response has occurred. With new mining equipment and labor in short supply, we see little indication this will quickly change. We believe our positions are poised to earn significant returns even if prices drop back to August lows, with tremendous upside if current conditions hold.
Each company added to our portfolio is evaluated for downside protection. In the event of a 2023 recession, we felt comfortable that many of our positions would be able to navigate the downturn. With unemployment remaining low, inflation moderating, and the Fed telegraphing the end of their hiking, the 2023 economy has exceeded our base expectations. In the event things worsen, we are optimistic we’ve built in an appropriate “margin of safety” by acquiring stocks priced well below intrinsic value.
New Positions
If you log in and check your accounts, you’ll likely see some familiar names from prior letters at the top of the pile. Further down, we continue turning over rocks looking for new places to deploy capital.
Abacus Life: We previously had exposure to Abacus via our ERES warrants, which have now de-SPAC'd. We have subsequently added a position in the Abacus common shares after the stock traded down 30% from the deal price. We think Abacus represents a better way to run a life settlement business than prior iterations like Emergent Capital, and we’re hopeful they can prove the resilience of their business model in the coming quarters.
CKX Lands: After announcing a strategic review of their business, we dusted off our CKX notes to deduce the most likely outcome. Interestingly, the management team was recently granted hundreds of millions to develop a carbon capture hub in southwest Louisiana, and it appears the CKX acres have some exposure to this project. We expect they will sell their other royalty acres and focus all their efforts on making this much larger project a success. We think a reasonable valuation for the CKX assets should exceed $15/share, which happens to be the price at which Management would maximize their incentive payouts. Is there a possible kicker from the carbon project? We'll see.
Warrior Met Coal: We switched horses from Arch Resources after reviewing our position against the other major producers this summer. Warrior’s stock price fails to reflect our valuation of their new Blue Creek mine, and Arch has struggled to maximize the value we expected them to extract from their assets. Going forward, Warrior has a chance to deliver significant returns to shareholders from low-cost mines well-positioned for exports of their high-quality coals.
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 Q3 we continued posting our work to Seeking Alpha, publishing writeups on Unit Corporation, Wheeler REIT, National CineMedia, Corsa Coal, CAVA Group, Superior Industries, and Warrior Met Coal. I really enjoyed appearing on Brandon Beylo’s Value Hive podcast to discuss my trade in Destination XL group and some of the opportunities we’re seeing in the market today. Mike and I enjoyed attending the MicroCapClub Summit in Chicago, getting to meet many other managers, and I had a lot of fun explaining our thesis on Children’s Place to the attendees.
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.
An investment with the firm involves a high degree of risk and is suitable only for sophisticated investors. Investors should be prepared to suffer losses of their entire investments.
Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of the firm described herein may differ materially from those reflected or contemplated in such forward-looking statements.
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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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