2023 Annual Letter

The S&P500 closed out 2022 with a 20% loss and every economist was predicting a recession to kickstart 2023. That recession prediction, which was pounded in the media all year long, still hasn't happened and the S&P 500 finished the year up an astonishing 24%. As it tuns out 2023 was one hell of a year.

Annual Performance

Seaside Private Capital (SPC) ended the year on a strong note with our fund performance up 28.74% for the year vs. 24.23% for the S&P500 Index. We actually trailed the index for most of the year and if you can recall in our Q3 Letter, SPC ended the third quarter at 10.89% vs. 11.68% for the S&P 500. We made up a lot of lost ground and then some during Q4 with SPC up 16.09% vs. 11.24% for the S&P 500, or nearly 500 basis points in 3 months. In addition to our outperformance, I am also confidant in saying that we have achieved these results with much less risk as our portfolio companies still trade at compelling valuations relative to the rest of the market. Overall I'm very happpy with our performance for the year.

Market Review and 2024 Outlook

The major story of 2023 was the evolution of artificial intelligence (AI) and the performance of the Magnificent 7 (Facebook (NASDAQ: META), Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), Google (NASDAQ: GOOG), Tesla (NASDAQ: TSLA), Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN). The Magnificent 7 was the primary driver of S&P 500 returns for the year, which now account for roughly 30% of the overall index. The chart below shows how all seven performed during 2023.

Aside from Meta and Alphabet, which we own, I am worried that valuations for the Magnificent 7 are getting a little frothy and I don't think this group will be a major driver of returns for 2024. We'll dive deeper into Meta and Alphabet later in this letter.

While the Magnificent 7 outperformed, the rest of the market was essentually flat until November when small/mid cap stocks started to rally. The real estate sector in particular outperformend in the fourth quarter (up 16.7%), which also helped lift SPC's performance given our substantial CRE exposure.

The source of this fourth quarter rally came down to the FED and expectations of potential rate cuts in 2024. The market is currently projecting three rate cuts throughout the year at 25 basis points (bps) each, so 75 bps total. The FED has clearly defeated inflation and now has it under control, which has been confirmed by the monthly data throughout the year. The inflation rate dropped from 6.4% in January to 3.1% as of Novemebr 2023 (most recent data print).

I think the inflation rate will continue to trend towards the FED's 2.0% target over time, but I don't think Jerome Powell and the FED are as eager to cut rates as the market is expecting. I think the FED takes a wait and see approach and only starts to cut rates when the economic data starts turning south. Jerome Powell and various FED governers have cautioned against cutting rates too early, but the market seems to be betting against those remarks with an assumption that the first rate cut will come as soon as March. Morningstar has a non-concensus view projecting six rate cuts in 2024. I think the Fed will be slow to cut, but if the economy does start to turn south we could see accelerated cutting on par with Morningstar's outlook, but we'll just have to see.

Given what I see in the markets right now, I think there are opportunities in the small cap universe where valuations are substantially cheaper than large caps. However, caution is warranted as diving a bit deeper there are many unprofitable small caps and the ones that are profitable are not exactly screaming cheap. Overall I'm trending on the cautious side with 14% of our portfolio currently sitting in cash/money market accounts. I'm also contemplating taking profits on our Meta position at the current valuation, which would boost our cash position substantially to ~28%. As a whole I don't think the market is that cheap. I also see investors entering 2024 with a lot more optimism than 2023, but I also see a lot more risks that are currently being discounted. In particular there are growing geopolitical risks (Ukraine, Isreal, Iran, Houthi rebel attacks on container ships, and China), over-optimism on rate cuts, slowing economic growth, and deficit spending to name a few. My alarm bells are fashing yellow so I plan to take on a more cautious approach and am fine sitting on a higher cash pile as we start 2024.

Portfolio Update

During the 4th Quarter we exited our position in Blackrock Inc. (NYSE: BLK) as I became less confident on the valuation relative to the growth profile of the business. More on this below. We were otherwise not very active in the quarter. As previously mentioned, 14% of the portfolio is currently sitting in cash/money markets earning 5.0% and the rest of the portfolio is deployed across 13 companies. I would consider 6 of those companies "non-core" holdings and fully intend to liquidate once prices come closer to fair value. Meta is our largest holding due to outperformance in 2023 and I've been contemplating selling at current prices (~$360/share), but for such a dominant company the current valuation mutliples aren't unreasonable. I think the monetization of WhatsApp will be a major growth driver for Meta going forward. So for now I continue to hold. I also consider META a core holding but will sell if the valuation gets too frothy.

Overall we generated a 17.42% IRR on the recent BLK exit, which brings SPC's total exits to 15 with a net IRR of 22.36% and a MOIC of 1.43x with an average holding period of 2.14 years. I'm very proud of the returns we have produced so far and expect to continue building upon this for years to come.

I have been evaluating new business ideas and shared some of those ideas here and here (we already own WBD), but have not pulled the trigger on any new investments. We do maintain an internal list of potential targets we are constantly evaluating and are ready to deploy some capital if the market provides opportunities.

Blackrock Inc. (NYSE: BLK) - Exited

This was our second time owning BLK, which was very profitable the first time we owned it (41.67% total return) and was profitable again the second go-around, although a bit less at a 26.47% total return. We held BLK for a shorter time period this second time. It is a business we know well and is easy to understand, but the valuation multiples seemed a little stretched for my liking and I would rather cash-in our chips and deploy capital into opportunities with faster growth and trading at a more reasonable valuation. We sold out our position at $725/share which was at a 20x P/E multiple. A few weeks later the stock rallied to ~$814/share, which was dissapointing to see, but the stock has since retreated to ~$780/share. In all, the valuation we sold at was in-line with our initial valuation framework for BLK, which I described in our 2022 Annual Letter.

2023 was a year conducive for inactivity by holding and managing existing positions - quite different from 2022 which was a great year to deploy capital. I think 2024 is setting up to be a great year to both harvest our gains from 2022 and to also deploy capital amongst all the geopolitical and economic volatility. As always, here at Seaside Private Capital we are astutely focused on value investing and are focused on owning great companies managed by great people. We are excited for the year ahead and look forward to carrying our positive momentum into the new year.

Sincerely,

Daniel Fas

Founder & CIO at Seaside Private Capital