Submitted by QTR's Fringe Finance
One of my favorite investors that I love reading and following, Harris Kupperman, has offered up his latest thoughts on the market and his fund’s positioning in his investor letter, out this week.
Harris is the founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection.
Harris is one of my favorite follows and I find his opinions - especially on macro and commodities - to be extremely resourceful. I’m certain my readers will find the same.
Please be sure to read both my and Harris’ disclaimers, located at the bottom of this post. The letter has been slightly edited for length and to focus on Harris’ take on markets.
Q2 2024 Investor Letter
We don’t currently own any Nvidia (NVDA – USA). For a few brief moments this year, we were even betting against NVDA (shame on me!). With the exception of a handful of mega-cap tech companies, most equities have been rather rangebound, as evidenced by the 4.96% return for the S&P 500 equal-weighted index during the first half of 2024. As an investor, it’s easy to bemoan the bubble in all things AI (really just one stock), but I won’t do that on these pages. My job is to find inflecting trends, and AI certainly is inflecting—to what, I don’t know—but it's inflecting. Hence why the market got excited about it.
At the same time, many of our positions are rangebound, because their results haven’t been extraordinary. Put simply, there hasn’t been much of an inflection in their results—yet. Sure, it’s easy to complain that the market is distracted by AI and ignoring how cheap our names are, but the market is rarely wrong. Individual investors can be wrong, but the market isn’t often wrong. The market doesn’t care if something is cheap—the market cares if reported numbers are improving rapidly. With a few exceptions, that hasn’t been the case with our names. However, in the instances where the reported numbers have been improving, the market has taken notice and paid us kindly—even if the stocks are of the curmudgeon deep value genre, far from the glamor of AI. The market is working as it should be—it’s our core investment positions that aren’t.
Let’s look briefly at Tidewater (TDW – USA), a position that we started buying in January of 2022 at a price of around $12. The shares ended June at approximately $95. What led to such dramatic price appreciation? Well, in the first quarter of 2022, the company reported $105.7 million in revenue and an adjusted net loss of $11.7 million. Fast forward to the first quarter of 2024, and the company reported revenue of $321.2 million and net income of $47 million. More importantly, the company guided to 2024 revenue in a range of $1.40 to $1.45 billion and gross margins of 52%, which is quite the improvement over $361.6 million in revenue, and a gross margin of 28% reported in 2021, the most recently available numbers when we were purchasing shares.
Sure, Tidewater is an old economy, highly cyclical, oil services business. It’s the sort of business that the market currently has extreme disdain for. I like to joke that the cool kids in finance wouldn’t even think to look at it. However, none of this matters—when a company produces results, the shares respond. Inflection investing works in most market environments—even ones where most market participants are chasing an AI bubble—assuming there actually is an inflection in underlying financial performance.
Unfortunately, for every Tidewater in our portfolio, we own a number of positions that did not produce outstanding financial results thus far in 2024. Without an inflection in performance, there has been no inflection in their share prices. While I remain optimistic that these companies will have results that inflect positively in the future, until the results actually inflect, the market simply doesn’t care—hence the rather meager returns thus far during the year.
Now, don’t get the idea that we own a bunch of loser companies. Rather, I believe that we own positions that are simply consolidating within strong, already-inflecting trends, with many of our positions having already appreciated strongly for us. However, until current results show another period of uplift, the share prices likely won’t either. We aren’t investing in AI, where the next century of supposed profits gets capitalized today—we’re investing in ‘boring’ businesses, where the shares do not care, until after the results have been announced. In some ways, this is my edge; I hope to estimate the future results before they’re crystallized and profit from that knowledge—while it is also a curse: we have to wait for that crystallization before our shares appreciate.
Economic Views and Positioning
I’m increasingly of the view that the US economy is slowing. How much it is allowed to slow, before more fiscal and monetary stimulus are applied, is hard to discern. However, it does appear to be slowing—particularly in sectors tied to the consumer.
We’ve used this knowledge to reduce exposure across the board. Some of these sales were very easy and obvious ones—if the consumer is slowing, sell consumer-facing positions. Others were tougher sales, primarily businesses that we’ve owned for a number of years, that have underperformed and become quite small in the portfolio. Large positions move our results, hopefully to the upside. Tiny positions are a distraction, and even when they work, they don’t really impact the outcome of things. We’ve held a number of these for quite some time. They’ve slowly been diluted by performance and inflows. I felt that the time had come to jettison them—even if I think they’re perfectly good investments. I want to focus my energy on my best ideas. Besides, in an environment where the market primarily cares about companies large enough to be absorbed into passive indexes—we might as well own those equities that are large enough to get the escape velocity of passive buying, should their financial returns inflect.
While the positions that we exited were individually quite small, in aggregate they comprised a moderate percentage of our capital. We are still not done with the sales,
but I’m glad to have more of our balance sheet back. I’ll be even happier when the sales are completed. I’ve always believed that if I’m going to sell something, it’s best to sell it in a benign environment—I don’t sell when the markets are in panic.
My expectation is that the economy continues to slowly deteriorate, until the next round of fiscal or monetary stimulus is unleashed. Given the upcoming elections, it’s unlikely that this stimulus will happen until after we learn who’s driving the bus, with the potential for extreme volatility along the way. This sounds like an environment that is tailor-made for reduced exposure, and maximum flexibility, as we enter the Great Macro Dreamscape. That’s how we’re positioned.
For this full letter explaining his portfolio and including Harris' fund's top positions, click here.
QTR’s Disclaimer: Please read my full legal disclaimer on my About page here. This post represents my opinions only. In addition, please understand I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have been hand selected by me, have not been fact checked and are the opinions of their authors. They are either submitted to QTR by their author, reprinted under a Creative Commons license with my best effort to uphold what the license asks, or with the permission of the author. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. This letter has been shortened and is not written in full here. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. I edit after my posts are published because I’m impatient and lazy, so if you see a typo, check back in a half hour. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.
Harris’ Disclaimer: This document is being provided to you on a confidential basis. Accordingly, this document may not be reproduced in whole or part and may not be delivered to any person without the consent of Praetorian PR LLC (“PPR”).
Nothing set forth herein shall constitute an offer to sell any securities or constitute a solicitation of an offer to purchase any securities. Any such offer to sell or solicitation of an offer to purchase shall be made only by formal offering documents for Praetorian Capital Fund LLC (the “Master Fund”) or Praetorian Capital Offshore Ltd. (collectively, the “Funds” or each a “Fund”), managed by PPR, which include, among others, a confidential offering memorandum, operating agreement and subscription agreement, as applicable. Such formal offering documents contain additional information not set forth herein, including information regarding certain risks of investing in a Fund, which are material to any decision to invest in a Fund.
No information in this document is warranted by PPR or its affiliates or subsidiaries as to completeness or accuracy, express or implied, and is subject to change without notice. No party has an obligation to update any of the statements, including forward-looking statements, in this document. This document should be considered current only as of the date of publication without regard to the date on which you may receive or access the information.
This document may contain opinions, estimates, and forward-looking statements, including observations about markets, industries, and regulatory trends as of the original date of this document which constitute opinions of PPR. Forwardlooking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms, and similar expressions. Actual results could differ materially from those in the forward-looking statements due to implementation lag, other timing factors, portfolio management decisionmaking, economic or market conditions or other unanticipated factors, including those beyond PPR’s control. Statements made herein that are not attributed to a third-party source reflect the views and opinions of PPR. Opinions, estimates, and forward-looking statements in this document constitute PPR’s judgment. PPR maintains the right to delete or modify information without prior notice. Investors are cautioned not to place undue reliance on such statements.
Return targets or objectives, if any, are used for measurement or comparison purposes and only as a guideline for prospective investors to evaluate a particular investment program’s investment strategies and accompanying information. Targeted returns reflect subjective determinations by PPR based on a variety of factors, including, among others, internal modeling, investment strategy, prior performance of similar products (if any), volatility measures, risk tolerance and market conditions. Performance may fluctuate, especially over short periods. Targeted returns should be evaluated over the time period indicated and not over shorter periods. Targeted returns are not intended to be actual performance and should not be relied upon as an indication of actual or future performance.
The past performance of the Master Fund is not indicative of future returns. Returns shown are calculated net of management and/or performance fees, and net of all other Fund expenses. All returns reflect the reinvestment of dividends. Present year returns are unaudited and subject to change. The performance reflected herein and the performance for any given investor may differ due to various factors including, without limitation, the timing of subscriptions and withdrawals, applicable management fees and incentive allocations, side pocket participation, and the investor’s ability to participate in new issues.
