2024 Annual Letter

It was another phenominal year to be an equity investor. The S&P 500 Index finished the year up 25.02%. That follows a gain of 26.29% in 2023 for a two year stacked gain of 57.88%. Higher interest rates haven't slowed down the economy, unemployment rates are still very low, and businesses also seem very bullish post-election. However, valuations seem to be pricing in all the positive news. The setup for 2025 is going to be interesting.

Annual Performance

Seaside Private Capital (SPC) generated a phenominal performance throughout the year with a positive performance through every single quarter of 2024. Our fund was up 43.55% for the year vs. 25.02% for the S&P500 Index. I am absolutely estatic about our results. I know that our significant outperformance won't happen every year, so although I am pumped about our results, it's important that we don't lose our focus and remain disciplined.

The fund underwent a lot of change this year as we harvested 5 portfolio holdings and are currently sitting in a strong cash position (I'll expand on this later). As I was processing the positions we sold, it was quite remarkable to reflect on our historical investment performance. Seaside Private Capital started originally started in 2015 and since then we have gone full circle on 20 investments. Our statistics across those 20 investments are: 2.49 years average holding period, 23.47% IRR, and 1.42x MOIC. See "IRR Summary" below.

I couldn't be more proud of the hard work we've done and the results we have achieved. However, not all 20 of those investments ended in positive outcomes, and I'm sure we'll have more dissapointments in the future. But as I look at those numbers, I am truly grateful to see that our hard work is paying off. I was surprised that our average holding period is only 2.5 years. As I look at this list I can see how our portfolio and our strategy has changed over time. As we focus less on classic value investments and allocate more capital to long-term compounders, I would expect much less churn (longer holding periods), and ideally higher MOIC. My original goal was to target a 20% IRR, which translates to our capital doubling every 3.5-4 years. So far we are outperforming on that metric with a 23.47% IRR. Let's hope we can keep that going.

Market Review and 2025 Outlook

The story of 2024 was very similar to that of 2023. There was some turbulence throughout the year, but generally the market just kept marching higher on the back of strong economic data. Inflation continues to remain manageable, currently ~3% and the unemployment rate is ~4.1%. On balance, the economy continues to be strong and earnings for S&P 500 companies are projected to accelerate in 2025. As you can see in the chart below, Large Cap stocks are projected to grow earnings 14% in 2025 compared to 9% growth in 2024.

Small and Mid Cap stocks are also projected to see accelerated earnings growth in 2025. All else being equal, stock prices tend to follow earnings growth, which leads me to lean towards optimism for 2025. The main counterbalance to all this positivity is that all this good news seems to already be priced into market. The top 10 stocks in the S&P 500 are trading at an average P/E of 29.8x while the remaining 490 stocks in the index trade at 18.2x. Stocks in general don't seem to be in bubble territory, but prices are certainly on the high side. Investor bullishness also seems to support this (see chart below).

Overall I would say I'm "cautiously optimistic" for 2025. I think the market has an opportunity to generate positive returns this year, but I also think there will be some turbulence due to high valuations and aggressive earnings expectations that are currently priced into the market. This has led SPC to take advantage of these high valuations by harvesting 5 positions in 2024. We are now sitting on a considerable cash position with ~30% of our portfolio sitting in a money-market account offering yields in the mid 4% range. If there is some market turbulence, we are in a great position to deploy capital.

Portfolio Update

During the 4th Quarter we were unusually active and took advantage of the market rally to exit 4 positions and to trim another. Although our preference is to not turn over the portfolio often, we will sell when we believe our holdings have been fully priced. The 4th quarter also allowed us to do some house cleaning since we were sitting on sizeable taxable gains. We were able to tax-loss harvest some losers that were eating up our time and resources.

Over time our ideal portfolio will consist of 10-13 excellent long-term compounders. However, over the past couple of years our portfolio got a little bloated with ~15 holdings. Most of which consist of classic value plays that were inherited prior to launching SPC. I believe there is still money to be made in classic value investing (as per the IRR chart above), but that has gotten much harder, more frustrating, and the risk of falling into value traps is much higher. As we move forward, we will focus our efforts on finding high quality companies that are run by best-in-class management teams.

Wyndham Hotels & Resorts, Inc. (NYSE: WH) - Exited

We exited our position in WH once we thought the position was fully valued. We acquired shares of WH in May of 2024 and in roughly 6 months the stock skyrocketed to our underwritten valuation. A part of me wanted to continue holding the company as I think they have a solid growth runway ahead. However, I think the market is fully pricing this in which leaves little margin for error so I decided to sell and take the profits.

Overall we generated a 83.43% IRR a MOIC of 1.34x. Holding period of 0.48 years.

The Macerich Company (NYSE: MAC) - Exited

Our journey with MAC began in March of 2019 when we began acquiring shares in the company after it was beaten down under the headlines "Retail Apocalypse". As a contrarian investor, I sifted through the data and realized that MAC was actually growing revenue and operating income, albiet modestly, amid all the negativity. The original thesis was that there was a divergence between trophy Class A retail properties and everything else. MAC in particular owns a collection of irreplaceable trophy mall assets. The more I learned, the more I fell in love with the company. Then came the pandemic in 2020 and the stock cratered. Malls were legally mandated to shut down and tenants stopped paying rent. MAC was also highly leveraged. It was the worst possible outcome. However, amongst all the chaos I sharpened my pencil and updated our modeling. I strongly believed that I was buying a dollar for 20 cents. So I dug deep and bought more, a lot more. I was ultimately able to bring my average purchase price down from an original $42.55 to $13.99. I was sick to my gut as the pandemic unfolded and the stock traded sideways for a couple of years. But in 2024, MAC brought in a new CEO and started cleaning up the balance sheet. The shares rose substantially and we were able to exit at $21 plus the healthy dividends we recieved during our holding period. I was hoping this would be a 3x your investment type of stock, but it wasn't. It was, however, a great lesson on price and value and not getting shaken out of a stock due to some volatility. I could have taken a huge bath on MAC, but instead generated a healthy 61% total return. Our patience and discipline ultimately paid off, but it was also a reminder that although classic value investing can still make money, is it really worth all the headache?

Overall we generated a 15.49% IRR a MOIC of 1.61x. Our holding period was 5.71 years.

AT&T Inc. (NYSE: T) - Exited

AT&T was a dissapointing investment for us. We started accumulating shares in November 2018. Not long after, in 2019, an activist investor engaged the management team and the stock had a quick pop. We should've sold at that point. We believed that the recent acquisition of WarnerMedia (June of 2018) would bring a substantial uplift to the free cash flow of the combined company. We were wrong. The streaming wars began to take off and it was a land grab for eyeballs and subscribers, regardless of the cost to gain those subscribers. Ultimately AT&T faced increasing Capex to fund their 5G infrastructure and at the same time Capex in the WarnerMedia unit also increased substantially. WarnerMedia was ultimately spin out a few years later. Luckily we were able to exit our T position at our original investment price and with the stock paying a healthy dividend, we ended up making a slight profit. In hindsight the lesson I learned from a portfolio management perspective is that I should have just ripped the bandaid off sooner. Once the thesis changed, I should have sold, even if it was at a small loss, and redeployed that capital into a higher quality investment.

Overall we generated a 1.45% IRR a MOIC of 1.08x. Holding period of 6.10 years.

Cannae Holdings, Inc. (NYSE: CNNE) - Exited

Cannae was a position we originally puchased as a classic value play trading at a substantial discount to the book value of its investments. We believed that this private equity company, managed by a very well respected Bill Foley, would generate outsized returns. Instead, over the course of our 3 year holding, it continually underperformed. We decided to exit the position and tax-loss harvest CNNE.

Overall we generated a -12.64% IRR a MOIC of 0.63x. Holding period of 3.47 years.

META Platforms, Inc. (NYSE: META) - Trimmed

We originally purchased shares in META during 2022 when the stock was getting hammered. META is arguably one of the best companies in the world. We discussed our purchase in our 2022 Annual Letter. Shares of Meta rebounded aggressivley from our original purchase price in the low $200's. I was somewhat concerned about valuation and position sizing so I trimmed our position when the stock hit $482. We still maintain a healthy position in META and are effectively playing with house money at this point.

On the META shares that we sold, we generated a 46.18% IRR a MOIC of 2.24x. Holding period of 2.02 years. The remaining shares that we continue to hold are compounding at a 45% annualized rate.

Final Thoughts

2024 turned out to be a great year for the fund. It was also a very busy year in which we locked in substantial gains and were also able to clean-up our portfolio by tax-loss harvesting some of our non-core holdings. We still have more work to do on this front, but our portfolio looks much stronger and healthier today than it did at the beggining of 2024. I am highly confident of our strategy and I believe we have the right tools and processes in place to ensure Seaside Private Capital will endure over the course of time. As we look to 2025, SPC is currently sitting on a very large cash pile, about 30% of our fund, which is earning a cash yield of roughly 4.4%. We continue to be patient and disciplined before we deploy capital and are cognizant of the inherent risks with valuations and investor bullishness at an all-time high. When volatility strikes we are ready to take advantage.

Sincerely,

Daniel Fas

Founder & CIO at Seaside Private Capital