NAPA - Merion Road Capital Q2 2024 Investor Letter

2024-07-16 06:25:00 ET

Summary

• The long only portfolio returned +1.5% during Q2.
• The Small Cap Fund generated a +0.6% return in what was yet another tough stretch for small cap stocks, with the Russell falling over 3%.
• Fundamentals came in worse than I expected and I ultimately realized that because the upside was less than my prior expectations, it did not justify current uncertainty.

The long only portfolio returned +1.5% during Q2. Our recent addition of Clean Harbors ( CLH ) proved timely and we benefitted from our meaningful allocation to Alphabet ( GOOG , GOOGL ). These gains were largely offset by contracting multiples amongst our industrial / cyclical names. Delays in rate cuts are the most likely culprit, as well as potential concerns regarding the fed's ability to navigate a smooth landing. It is important to remember that these positions generate a large percentage of their earnings from nonresidential and municipal customers where demand is less exposed to rate pressures. Furthermore, with allocations to mega projects still working their way through the system, they benefit from an embedded tailwind. And when rates do become more accommodative, I expect multiples to recover....

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