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Alternative Market Briefing

U.S. concentrated hedge fund details best ideas

Wednesday, January 26, 2022

Shawn Badlani
B. G., Opalesque Geneva for New Managers:

Honest Partners, a San Francisco-based concentrated, long-term, long-biased fund that invests in high-quality North American small and mid-cap equities, returned 5.6% (net) in 2021, and a total of 99% since its May 2020 inception.

The largest contributors to Q4's gross performance (2.6%) were the long positions in Builders Firstsource and Dream Finders Homes. These were partially offset by detractions from Cardlytics and Green Thumb Industries.

The managers did not exit or enter any new positions during the quarter, although they took advantage of some intra-quarter volatility to reallocate capital among existing positions, concentrating capital in the investments they believe currently offer the most attractive risk-adjusted return profile. The fund ended the quarter fully invested with 11 long positions accounting for 99% of the portfolio, and one short position accounting for 1%.

"Regardless of the many current uncertainties in the world, we remain firm in our belief that a highly selective, company-specific, deep fundamental strategy is the most prudent approach to deploying capital," they say.

Best ideas

These seven positions account for more than 80% of the Fund's capital:

1. Green Thumb Industries (GTBIF) continues to lead the burgeoning US cannabis market, with vertically integrated operations in 15 states.

"I think it is a great time to be investing in US cannabis stocks," founder Shawn Badlani tells Opalesque. "In general, the stocks have been weak as sentiment around prospects for federal legalization of cannabis has faded. However, what actually matters far more for the companies' business operations are state by state developments, and those are progressing exceptionally well. New Jersey, New York, Connecticut, and Virginia are all confirmed to begin allowing sales of recreational marijuana over the next two to three years, and Pennsylvania and Ohio almost surely will do the same. When states like Illinois and Arizona made similar transitions from medical to recreational sales, it effectively quadrupled the sizes of those markets almost instantly.

"So I believe the industry is set up for extremely robust growth over the next few years, and valuations have gotten quite attractive."

2. Builders Firstsource (BLDR) has realised significant synergies from its transformational merger with BMC Holdings and continues to take market share and outgrow its underlying market due to its higher-margin, value-added, prefabricated products.

"I do believe it is a good time to invest in the US homebuilding market," Badlani says. "Demographics should provide a very strong tailwind for the next few years, as the largest millennial cohorts enter their prime home-buying years. On the supply side, the industry has been systematically underbuilding homes for the past 13 years since the Great Financial Crisis, creating a large deficit of new homes that will need to be constructed."

3. The Container Store, the only national retailer solely devoted to storage and organization, has a differentiated, proprietary offering, and extremely strong customer loyalty.

4. Dream Finders Homes is a homebuilder that is well positioned to benefit from the strongest parts of the current housing market, as it focuses on more affordable entry-level homes in faster-growing parts of the country (Florida and Texas).

5. Cardlytics is a digital advertising business running cashback offers inside banks' websites and mobile apps.

6. Caesars Entertainment's shares sold off during the quarter, presumably due to resurgent coronavirus fears with the omicron variant. Meanwhile, several company-specific developments are setting up a highly attractive investment outlook.

7. IAC/InterActiveCorp completed its highly accretive acquisition of the digital publishing assets of Meredith Corporation during the quarter. The transaction should provide significant synergies.

"Lastly I also think it is a good time to be investing in the online gambling and sports betting industry," he adds. " The industry should experience very strong growth as more states legalize these activities, which should generate tax revenue to help combat deficits coming out of the coronavirus pandemic. Stocks of many companies exposed to this industry have pulled back recently after rallying strongly last year, creating a good entry point in my opinion."

The HFRI Equity Hedge: Fundamental Value Index was up 14.7% in 2021.

Related article:

29.Dec.2021 Opalesque TV: Value hedge fund gains from past experience with the great and the good

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