Q1 2024 Letter - Rising to the Top

Market continues to march higher while inflation proves to be sticky and geopolitical risks continue to increase.

Quarterly Performance

Seaside Private Capital (SPC) continues to follow-up on our strong performance from 2023 and closed-out the 1st Quarter of 2024 up 12.51% vs. the S&P 500 at 10.56%.

Rising to the Top

SPC had a relatively quiet first quarter as stock prices continued to march higher. As I write this letter in early April, the market seems to be coming to terms that getting inflation down to the Fed's 2% target will be tougher than originally anticipated. At the start of the year wall street concensus was for 6 rate cutes in 2024. After multiple dissapointing inflation prints, the market is now expecting only 2 rate cuts later this year. Some economists are questioning if the Fed will even cut rates at all. Jerome Powell doesn't want to cut rates with inflation still well above the Fed's 2% target, because it could end up making things worse by reaccelerating inflation. The Fed's strategy seems sensible to us and that's why we've been building up our cash balances starting in early 2023 (I originally outlined this risk in our Q1 2023 Letter). Only in the past few trading days the market has accepted that we may be in a "higher for longer" interest rate environment and prices have started to react accordingly.

As the market has continued to rip higher in Q1, the S&P 500 is now up over 36% over the past 18 months. Investor bullishness is also starting to reach peak levels, which support my somehwat defensive stance. The chart below is provided by Charlie Bilello, which shows the percentage of bulls in a recent Investor's Intelligence survey.

Source: Charlie Bilello

Source; Charlie Bilello

The current bullish reading at 62.5% ranks in the top 5%, which you can see in the second chart does not bode too well for forward returns. Having said that, I believe the market isn't overvalued. The S&P 500 trades in the high teens P/E multiple range once you take out Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA),Tesla (NASDAQ: TSLA), Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN). That's not terribly high, but not dirt cheap either. So in general we remain cautiously optimistic and comfortable hanging onto a hefty cash balance (23% of our portfolio) ready to deploy upon any market dislocations.

In the face of the risks mentioned, SPC does continue to play offense. Meta Platforms (NYSE:META) was our best performer in the quarter after the company reported very strong earnings that surprised even the most bullish analysts. The stock is up nearly 40% YTD. It was otherwise an uneventful quarter for SPC. The fund continues to hold a mixed-bag of classic value investments, REITs, and high quality compounders. As mentioned in previous letters, we are opportunistically selling our classic value investments and redeploying capital into high quality compounders. It's a long and ongoing process to overhaul the portfolio, but we are already seeing strong results and improved performance from this shift in strategy. We still have some dogs in our portfolio consisting mostly of classic value plays, but they are typically small (less than 3% positions), which we will liquidate when the opportunity arises.

Since inception, Seaside Private Capital has outperformed the market. We don't expect to outperform every quarter or even every year as we don't manage the portfolio to generate short-term results. We focus on the fundamentals and solid underwriting, which we expect to produce outperformance over the long-term.

Portfolio Update

Warner Bros. Discovery

We made a small addition to our Warner Bros. Discovery (NASDAQ:WBD) position as the price dropped to an all-time low on the back of generating $6.2 Billion in free cash flow for 2023 (~$5 Billion normalized FCF, ex actor strikes). We concede there are still major risks, primarily related to decline in linear TV, overall revenue growth and dissapointing EBITDA numbers, but we are confident in the value of the company and WBD's ability to get back to growth. We invested in this compnay assuming 3-5 year hold period and we are only 2 years into this story. There's plenty of runway ahead.

Meta Platforms

Meta had a blow-out quarter topping analysts revenue forecasts by over $1 Billion, launching its first ever dividend, and boosting its share repurchase plan by $50 Billion. Meta's ad revenue increased 24% YoY and operating income for its "family of apps" (Facebook, Instragram, and WhatsApp), nearly doubled. For a company of this size, the numbers are almost unbelievable. After the runup in shares we did trim our position in Meta to control our position size and take some profits off the table at the current valuation. We still maintain a healthy position in the company.

Rest of Portfolio

The rest of our portfolio holdings continue to chug along, but nothing notable to call out.

We didn't find any attractive opportunities to deploy capital in the quarter. We ended Q1 with 23% of the portfolio invested in cash/money market funds and will remain patient and disciplined until the right opportunities present themselves.

Concluding Remarks

As we enter Q2 we have been busy analyzing potential acquisition targets and some are coming close to our trigger price. Hopefully we can report on a new portfolio company in our next letter. In the meantime we remain cautiously optimistic on the market for the balance of the year (neigher bullish nor bearish), but hold a steady cash balance in the event volatility returns to the market. We remain confident in our portfolio positioning and look forward to reporting our Q2 results in our next letter.

Sincerely,

Daniel Fas

Founder & CIO at Seaside Private Capital