ALTO - First Half 2023 Performance (+46.5% Vs. +7.4%)

2023-07-19 17:30:30 ET

Summary

• This article discusses my first half of 2023 investment performance.
• I share the good, the bad, and the ugly, and lessons learned.
• Fortunately, I'm happy to report that my first half 2023 performance was +46.54% vs. +7.4% for the Russell 2000.

It is that time again, report card time. Specifically, it is time to report our first half 2023 performance to the Seeking Alpha readership. Now, there are hundreds of authors, all competing for the readership's valuable time and attention. From a reader's perspective, I would argue following authors with consistently strong performance and an ability to think and write well are far and away the most important attributes. Further, there is only so much time in the day, as there are what feels like a seemingly and endless stream of new information, new articles, and new things to think about, on a daily basis. It is so easy to get lost in this fast pace and swept up in the excitement, of markets, especially when we are in a bull market.

That said, I would argue, how you allocate your time and bandwidth can be a big factor in your overall investment process (and hopefully longer-term return profile).

Despite still only playing "B" baseball, through the first half of 2023 (candidly, and truthfully, I haven't played "A" ball, since 2020), inclusive of riding the wild market volatility, both good and bad, and the major sentiment swings, I'm happy to report my first half 2023 total return performance of +46.54% vs. +7.4% for the Russell 2000 ( IWM ). As a small cap value and special situation investor, the Russell 2000 is the best, most accurate, and fairest way to compare my relative performance, as I don't own any companies with market capitalization north of $8 billion and the vast majority of the names (and invested capital), held in the portfolio, have market capitalizations sub $500 million.

Admittedly, though, last year, and very much a one-off, and truly a special situation setup, I made Netflix, Inc. ( NFLX ) my largest sized bet (see: As Bill Ackman Liquidated, Netflix Is Now My Largest Sized Position ( published April 21, 2022 ). Candidly, and generally speaking, I'm not nor I've ever really been a whiz bang technology investor, and I certainly don't own the mega caps or the "Cathie Wood" stocks ( ARKK ).

As someone in the trenches, nearly every weekday, I'm intentionally (and perhaps blissfully) unaware of how the overall/ broader stock market is moving on a daily performance. It just isn't part of my process nor does it impact how I allocate capital and put capital at risk. I very rarely watch CNBC (usually only when Chairman Powell is hosting his post Fed announcement/ meeting press conferences, held with the financial press core and broadcast on the financial media networks), intentionally and deliberately avoiding the good opinion of the pundits, the talking heads, and the stock market whispers. The idea is to keep it as simple as possible, and my job is to pick stocks and allocate capital in businesses that are undervalued, have a catalyst, with good management teams, regardless of all the macro noise. For perspective, please reference my recent, " As Peter Lynch Said : 'If You Spend 13 Minutes A Year On Economics, You've Wasted 10 Minutes'" article, which was published on June 15, 2023.

Of course, no question, it is always easier to perform better when markets are rising, and sentiment is bullish. However, my goal is generate positive returns, year in and year out, and create a lot of alpha. As mostly a long-only investor, 2022 was a dog fight, but I was able to generate a positive return, albeit by a whisker. My mantra and thought process is no excuse, always aim for achieving high marks, regardless of how fierce the headwinds you face.

The way I attempt to do this is through old fashion, bottoms up fundamental analysis and stock picking. I spent a lot of time synthesizing, trying to figure out and understanding businesses, sectors, thinking about where a company is in its life cycle and business cycle, and speaking with management teams. Yes, of course, I'm aware of charts and momentum measures and other seemingly fancy barometers, but this is a very small part of my overall process.

Top 5 (1st Half 2023) Highlights

• TravelCenters of America, bought by BP p.l.c. ( BP ): +720 Bps
• RCM Technologies ( RCMT ): +373 Bps
• Kopin Corp ( KOPN ): +364 Bps
• eHealth, Inc. ( EHTH ): +217 Bps
• Mesa Air Group, Inc. ( MESA ): +212 Bps

Top 3 (1st Half 2023) Lowlights

• Tingo Group, Inc. ( TIO ): -329 Bps
• Playtika Holding Corp. ( PLTK ): -291 Bps
• ProShares Ultra Bloomberg Natural Gas ( BOIL ): -217 Bps

In terms of what positively drove first half performance, the biggest driver was TravelCenters of America getting bought out for $86 per share, by BP plc. I was long TA shares, since September 1, 2021, at $41 per share, and maintained this position, as a core position and as a top five or six portfolio allocation (depending on portfolio fluctuations). Needless to say, February 2023 and the BP buyout announcement was a very good day.

Secondly, in late March 2023, after RCM Technologies reported what I thought were good Q4 FY 2022 results, I sized it up, to a 10% sized position, at $13.25. A week or so later, RCMT shares dropped nearly 30%, in my face. I spoke with the CFO, for an hour, sharpened my pencil, re-read and listened to the then most recent conference calls, a second time, and ended up added more shares, in the upper $10s and low $11s. At $12 per share, the company was trading a P/E ratio of 6X, insiders owned a lot of company's equity, management was aggressively buying back shares, the balance sheet was fine, and the company's longer term outlook for its K-12 nurse staffing business was and is robust. Three months later, and just yesterday, RCMT shares rebounded smartly, briefly trading over $20.

Outside of these two names, the biggest positive driver of my first half 2023 performance was aggressively adding to Kopin Corp, in early May 2023, at $1.07 per share, after listening to Michael Murray's Q1 FY 2023 conference call and outlook. Additionally, adding to my Mesa Air Group position, on the unexplainable dip, into the low $1.40s, really helped. Moreover, I bought a fair amount of Alto Ingredients ( ALTO ), in late March 2023, at $2.05. I then watched the stock trade down into the low $1.20s. A move from $2.05 to $1.20 is a big percentage drawdown, but not really a big market capitalization move per se. This is an important nuance many retail investors often overlook.

Therefore, if you do this for a living, these drawdowns are kind of par for the course, and as an analyst and allocator of capital, you have to really focus and work out if these drawdowns are compelling times to aggressively add. Alternatively, though, you must also consider and determine if your thesis has been broken and therefore need to take some expensive medicine (take your losses).

Incidentally, just yesterday, ALTO shares closed at $3.85. Admittedly, I sold too soon, as I only have so much capital and mathematically can only own so many 15% sized bets, at one moment in time. I don't have a margin account and have to keep a mandated minimum amount of cash, at all times, per my investment committee. As a quick aside, SA Contributor, Justin Dopierala , of DOMO Capital, wrote a fantastic and perfectly timed piece on ALTO.

See here:

If you look at the comments section, on May 6, 2023, I complimented him on a great piece of work.

See here:

Incidentally, I've spoken with ALTO's CFO, Bryon McGregor, about four times, and twice since early April 2023. He is a very good CFO and a straight shooter. Moreover, behind the paywall, in my Investing Group, here on SA, I wrote two bullish ALTO articles (March 23, 2023 and March 28, 2023).

Again, I definitely partially missed/ didn't fully take advantage of ALTO, specifically, its second and recent big leg-up, from $2.50 to $4 (yesterday). My long-winded point, though, is to call out, that in the span of four months, ALTO moved from $2 to $1.20 to $4. "Courage" and "Conviction" are a prerequisites to successfully competing in small cap sandbox.

See here:

In terms of the lowlights, hence why I'm only playing "B" baseball. Despite writing up and owning a 10% sized bet, in Tingo Group, at $1.08, net-net, I ended up losing 329 Bps, of overall portfolio performance. Despite TIO shares leaping from $1.08 to $5.69 (or a 5 bagger), before the Hindenburg Research piece torpedoed TIO shares, somehow I still lost money here. Let's just say, I was still well-sized in Tingo the day the Hindenburg piece hit the wires, and that wasn't a fun day.

Secondly, I had a legacy position, in Playtika, from last year, on the confusing and purportedly $21 offer, by a private equity firm to buy a controlling equity interest. This never materialized and I got caught on the wrong side of M&A arbitrage. Candidly, I oversized the PLTK bet, at $15 per share, and elected to crystalize the loss, around $11 per share, during the first half of 2023.

Lastly, I made a big unforced error messing around with ProShares Ultra Bloomberg Natural Gas ETF ((BOIL)), in January 2023. As we know now, we had a really warm winter, in the U.S. And let's face it, BOIL is a great way to lose money, as the Contango roll, and 2X leverage decays simply erodes your capital, and quickly. BOIL is only really suitable for holding for intra-day to less than a week. Further, a modestly sized bet, in BOIL, quickly got away from me, before I realized I made a bad unforced error and had to take my expensive medicine.

Putting It All Together

Recency bias and the carnage of 2022 gave way too many market participants the romantic notion that markets just do straight down and that shorting was the fastest and easiest way to generate monster returns. Lo and behold, massive short interest, reflecting a ton of fear (bear sentiment), a resilient consumer, and tangible signs of peaking inflation have changed the narrative. Oh yeah, and then there is the AI boom, which has acted has a major lightning rod and catalyst, igniting animal spirits and raising the hair on people's arms, at a safe and mesmerizing distance. If my long time readers haven't done so, I highly encourage everyone to read (or re-read) my Peter Lynch piece linked above.

Over the course of time and market history, measured in decades and not in months and years, it has paid handsomely to an optimistic on America. America is dynamic, is full of really ambitious, smart and talented people (both born here and that move here for the outsized opportunities available here), and there is still a robust innovation culture in the American experiment.

As for the second half, of 2023, my playbook and go to market strategy remains the same. Buy under followed, mis-understood, and undervalued businesses. Good management teams, with skin in the game, notably in small cap land, tend to be (major) positive drivers of performance and avoiding bad management teams, despite attractive valuations is paramount. In closing, stay intellectually curious, do your homework, and don't be afraid to roll-up your sleeves. There are no shortcuts and I've found, and as the saying goes, the harder I work, the luckier I seems to get. That said, I need to do a much better job of letting my winner's run.

Here's to the intellectually curious and passionate market participants. Wishing everyone an auspicious second half 2023!

Cheers,

CCI

Appendix

Enclosed below are the monthly Fidelity performance snapshots, which was created by using Fidelity's performance tracking tools. This show readers the cadence of monthly performance.

Flagship Account

Smaller Managed Account

For further details see: