Drawdown: Part II – March 2018

Drawdown – Part II

In March we didn’t protect the downside as well as we did in February. Most of our losses in the month came from our European long book. A lot of our high conviction names declined significantly amidst the volatility and the absence of news post earnings season. Our work during the month indicates the thesis is very much on track with substantially all our high conviction positions. Therefore, we remain very confident for the performance of our portfolio going forward.

Our short book also didn’t perform up to our standards. That said we found new compelling ideas and added them to our book towards the end of the month.

Somar Contest – Name the Company

We like to keep the companies in our portfolio secret until we exit the positions so that we maintain mental flexibility and openness to incoming information and to change our minds. We are protecting against the commitment and consistency bias and the flawed decision-making it entails. At Somar we let the facts dictate what we should do with our portfolio. We strive to keep our ego and any public statements away from rational decision making on behalf of our investors.

The downside of this, is that you get less information on the portfolio than you probably would like. Also, most investors and prospective investors don’t have a way of discerning the diversity and attractiveness of our opportunity set.

To mitigate this, we launched a contest: “Name the Company”. Basically, we will provide you a description of companies in our portfolio (either long or short) and allow you the opportunity to guess their names and confirm it with us. What’s in it for you? Hopefully some fun and a $50 Amazon gift card. We are rooting for you and look forward to sending a lot of cards.

While fun, we hope this game will illustrate to you how “under-the-radar” these are. We work hard to deliver the highest returns and to earn your trust. Good luck!

Company A

This company is an emerging global leader in the fashion retail industry. It uses a “fast-fashion” supply chainfor fulfillment. This means on average they can get a run produced and on sale 2 to 3 weeks after it was first designed. They sell only online, using three different brands. For marketing they rely both on traditional performance marketing channels (search), word of mouth, and celebrity endorsement on Social Media. Their revenue growth has ranged between high double digits and low triple digits since inception and they are solidly profitable. Currently most of their sales come from their own clothing design but they are looking to add other brands to the offer. We estimate company only has a low single digit share of their market.

Company B

This company is a pioneer in the gaming production support services marketing. They partner with gaming studios to help them build international versions of their game. They also test games for bugs before they get released to the public. Recently they have developed art work, engineering and co-development capabilities. These offers are more and more important for game studios as games become more social and business models evolve towards “game as a service”. Company B has also been asked to build augmented reality apps for other companies. Currently more than 90% of the world top 25 gaming studios work with company B.

Company C

This company is a leading platform for self-directed investors. They offer consumers low prices, a best-in-class service and wider range of investment options. Their superior offer means they can grow revenues in the high teens to low twenties range on a consistent basis benefiting from the shift from defined benefit to defined contribution pension plans. They are developing an app that will allow consumers to move their cash between financial institutions to take advantage of the best interest rates at the click of a button. This will be a pioneering product in the developed world. If successful, this cash product will almost double their addressable market.

Company D

This company is a payments disrupter addressing an underserved market: individuals and small businesses that are mostly unbanked or underbanked. They use direct distribution supported by media, unlike their competitors that mostly use bank branch distribution. Company D serves the full needs of their customers with an offer ranging from wallets, to acquiring services and POS / dongle sale. They have been growing revenues in the high double digits / triple digits and are solidly profitable with expanding margins due to operating leverage. We estimate their current market share is still in the mid-single digits.

Company E

This company is a global pioneer in the funding and investment in legal claims. Litigation costs are escalating due to higher costs of discovery. For example, lots of data is now available in electronic media: e-mails, voice-mails, text messages, phone call logs, etc. The additional hours it takes to compile and analyze all the relevant facts make it riskier for parties to pursue litigation. Law firm clients are asking them
to take risk and contingent payments on outcomes. Law firms prefer to bill by the hour and not be at risk but are being forced to adjust to the market pressures. Company E offers an alternative by financing these costs in exchange for preferred returns and contingent payments. Their return on invested capital has been
stellar and we estimate only a single digit percentage of the overall opportunity has been tapped.

Company F

Company F is an emerging educational k-12 provider in a major global economy. They are the leader in premium tutoring and support services. Led by the founder who is also its largest shareholder, they are still early in the capture of their overall opportunity. We estimate their market share is only low-single digits but company F is growing more than 30% per year. Their product is outstanding: their rate of acceptance of placement of students into top Universities in the country is more than 5x that of the national average.

Company G

A leading fashion and clothing retailer in the USA. Company G built its success on strong branding and attractive locations for its stores. Most of its sales still come from brick and mortar stores but it is developing an active online presence. Its supply chain is efficient and organized around cost minimization. This leads
to most of its production being made in Asia and long cycles (3 months or longer) between clothing design and the time a piece is available in store. This has created challenges to sell items at full cost as more competition emerges using fast supply chains and electronic distribution channels. Company G has hired a new CEO in the last 18 months.

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We hope this glimpse provides you with more information about why we are excited about the future performance of our portfolio. We can’t wait to see your answers and hopefully to send a lot of $50 Amazon cards to the winners. Also, if you have suggestions for us on how to do this more informative and fun for you please let us know.