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Greenhaven Road 1Q17 Letter – FCAU, FIG, HHC, VDTH, ETSY

Greenhaven Road Capital 1Q17 Letter, May 3, 2017

“Nike and Berkshire Hathaway have been brilliant investments over the last thirty plus years, and both have seen short-term declines of 50% or more three separate times on the path to a many-thousand-fold return… Short-term success does not make us immune to the inevitable gyrations even wonderful investments experience over their life.”

Performance

  • 1Q17 gross returns of 19% compared to S&P 500 6% and Russell 2000 2.5%
  • Aided by announced acquisition of Fortress, second largest holding, by Softbank at a 61% premium to where shares started in 2017
  • Also, announced acquisition of Halogen Software by Saba Software at a 43% premium to where shares started 2017 helped performance

Top 5 Positions

  • Fiat Chrysler: If turnaround continues to be successful, Fiat will earn in excess of $5 next year and have a net cash position; company will benefit from margin expansion as their product mix shifts away from commodity sedans and increasingly towards luxury cars (Maserati and Alfa Romeo) and SUVs (Jeep)
    • Several ways to realize value including selling off the parts business or spinning off the luxury brands as they have already done with Ferrari
    • Strong businesses with strong brands and reasonable balance sheets do not trade for 2x earnings for long – either the company will fall far short of their 2018 plan and today’s prices will seem reasonable, or they will continue to execute and today’s prices will be deemed quite attractive
  • Fortress Investment Group: Agreed to be bought out by Softbank for $8.08 per share; continued to add to this long-term holding throughout 2016 as the share price bounced around in the $4s; with 45% of shares held by insiders who are supporting the Softbank acquisition, it is highly unlikely the deal “breaks”
  • Howard Hughes: Recently been opportunistically adding shares to our 6-year position; company has fantastic set of assets including 60 acres in Honolulu, the Summerlin planned community in Las Vegas, and The Woodlands community in Houston; confident that sum of the parts is greater than $115 where recent shares were purchased
    • In late 2010, CEO spent his own money (not options) to purchase $15 million worth of warrants that would allow him to acquire 2.3 million shares at $42; in company’s proxy statement, management asked for shareholder approval to sell another $50 million of additional warrants to the CEO
    • Scheduled its first analyst day in May and management started holding quarterly calls – appears a concerted investor relations effort has begun
    • Currently structured as a C-Corp and benefits from a tax shield related to legacy losses. As this shield is depleted and REITs continue to receive generous valuations from yield-starved investors, would not be surprised to see a favorable corporate action such as spin-offs of some income-producing properties such as hotels, malls, and retail
  • Videocon d2h: Shares appreciated almost 40% over the quarter; the Indian “direct to home” TV company’s merger with DishTV India remains on track to be completed this year, yet the shares continue to sell at a double digit discount to the value of DishTV India shares we’ll ultimately receive; rationale for the deal continues to make sense, there will be real operating leverage in the combined business and reduced risk of a price war
  • ETSY: New investment (discussed in more detail below)

ETSY (New Investment)

  • Mission-driven e-commerce company that builds markets, services and economic opportunity for creative entrepreneurs – serving as an alternative to Amazon and eBay, features unique, handmade items often sold directly by the designers
  • Instead of competing on price or speed of delivery, attracts shoppers because purchases on the site support the “little guy” which has emotional value to many Etsy consumers
  • High value proposition from a vendor’s perspective: over 28 million individual consumers made purchases vis Etsy in 2016; accessing this swath of 28 million purchasers costs vendors a mere 20 cent listing fee per each item to be included on this site; last year, there were 1.7 million active sellers on Etsy
  • Network effects: sellers come because there are buyers on the site and buyers come because of the quality and quantity of items available; Etsy itself is a platform – holds no inventory and instead makes money on transaction fees
  • Unique and differentiated platform with long runway as it expands domestically and internationally – IPO’d at $16/share, traded as high as $30 and currently trading in the mid-$10’s (market cap just over $1B with almost $300 million in cash)
  • Revenues grew over 30% last year and has guided to over 20% growth this year; shares trade at an EV/Rev of less than 2x, which seems more than fair given balance sheet strength, unique positioning, revenue growth, and length of runway
  • What is not to like? Far lower insider ownership than our typical investments; primary insider owners are top tier VCs Union Square Ventures and Accel Partners; CFO is at the end of a six-month departure process; Amazon has launched a competitive offering, Handmade
  • Company made meaningful accommodations to a recent activist investor Black-and-White Capital: naming a new CEO with experience at eBay, layoffs to address swelling SG&A expenses, naming Fred Wilson as Board Chair, and changing the CTO to address technical issues
  • Asset light business model, unique products, and a robust community of creative entrepreneurs has value – 4th most visited general merchandise shopping and the 50th most visited site in the US
    • Etsy would be a bite sized acquisition for eBay which is starved for growth

Outlook

  • Not changed at all from last quarter: skeptical of the Trump rally
  • Understand the euphoria around the potential for changes to the corporate tax code – it’s impossible to argue with the math
    • For profitable companies, when taxes go down, earnings go up
    • Given Republican majority, likelihood of reform is clearly increased
    • However, inertia is a powerful force and legislation by a committee of 600+ people has the ability to stall or bastardize the magnitude of tax reform the Trump bulls are hoping for
Image Source: Twitter @GreenhavenRoad
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