THC - River Oaks Capital H2 2023 Letter
2024-02-10 09:05:00 ET
Summary
- River Oaks Capital, a long-only, concentrated fund, is managed by Whit Huguley, CFA. River Oaks Capital invests mainly in companies between $50m-$1b. Our focus is on backing good capital allocators at undervalued prices due to our long-term focus versus the markets short-term nature.
- The most talked about news in the financial markets throughout 2023 was how incredible the stocks of the “Magnificent Seven” performed versus the rest of the U.S stock market.
- For the past six months, we’ve mostly been increasing our ownership in a few companies already in the fund as they have remained significantly undervalued despite underlying improvements in their business.
- In 2022, we invested in three community banks, and while 2023 was a tumultuous year for community banks in general, our three companies have weathered the storm well and are in a great position for future growth.
Performance
Our Companies
"When there is a frenzy of activity in one area of the market there is very often an anti-bubble of discarded companies"- Nick Sleep
Perhaps the most talked about news in the financial markets throughout 2023 was how incredible the stocks of the "Magnificent Seven" - Amazon ( AMZN ), Apple ( AAPL ), Google ( GOOG , GOOGL ) , META , Microsoft ( MSFT ), Nvidia ( NVDA ), and Tesla ( TSLA ) - performed versus the rest of the U.S stock market.
If you started 2023 with a market cap weighted portfolio of these seven stocks, you would have generated over a 75% return and over a 100% return with an equal weighted portfolio. This is compared to just a 12% return for the other 493 companies in the S&P 500! ( SP500, SPX )
Although most of these seven stocks performed poorly in 2022, it is unprecedent for seven of the largest companies in the world - their average market cap is over $1 trillion - to drastically outperform the rest of the market. It is hard to even fathom where the money comes from that could create a collective $5+ trillion increase in market cap for the "Magnificent Seven" in just one year!
Some investors would say the reason for these astronomical 2023 returns are due to the rapid development of artificial intelligence, which will be a powerful tailwind in the future. Perhaps, other investors would just say this is a massive tech bubble with some similar attributes to 2000. Regardless of the reason for the "Magnificent Seven's" 2023 performance, it has highlighted an important trend for our fund - the growth of passive investing. Passive investing is when instead of looking for mispriced stocks, an investor purchases a large basket of equities seeking to replicate an average stock market return. A common form is called 'index investing.'
An example of this is when an investor buys all 500 companies in the S&P 500 through an ETF - Exchanged Traded Fund - instead of actively buying individual stocks they find attractive. Teresa, a 45-year-old U.S. accountant, works at KPMG. At the end of each month, she automatically invests $1,800 into her 401k. It's likely that a significant portion of the $1,800 is being invested into an S&P 500 ETF or a similar investment vehicle. This trend has accelerated over the past decade. Historically, perhaps Teresa would have given the $1,800 to a money manager that would have actively picked stocks they found attractive. However, those days seem to mostly be long gone.
This growth of passive investing is not only happening at the individual level, but also at endowments, charities, corporations, etc. It is quite difficult to say precisely what percent of the U.S stock market is now passively invested money - most research seems to conclude it is now 50+% versus less than 15% in 2000 - but no matter how you measure it, the growth has been hard to digest. For instance, the big three index fund providers - Vanguard, State Street ( STT ) and Blackrock ( BLK ) - now own over 20% of the S&P 500!
The point here is not to criticize passive investing - it seems to be a net positive for the average investor - but rather to consider how this trend directly affects the small, underfollowed companies River Oaks Capital buys ownership in. One thing about passive investing seems certain. It disproportionately benefits larger public businesses as they are the companies that are both 1) included in indexes and 2) weighted the most heavily....
River Oaks Capital H2 2023 Letter