Letters

Macro Recovery? It’s Not That Simple

April 2020

Macro Recovery? It’s Not That Simple

We’ve seen two years’ worth of digital transformation in two months. – Satya Nadella, Microsoft CEO

For the past five weeks I have not touched a single coin or banknote, instead relying exclusively on electronic payments systems and credit cards that only I touch. – Gary Cohn, Former Goldman Sachs COO

[Recently] we have seen 800% increases in sales. – Duncan Painter, Ascential CEO

The world has changed. […] We took money out of the [airline] business basically even at a substantial loss. – Warren Buffett, Berkshire Hathaway CEO

These recent quotes illustrate the divergent paths that different businesses are taking amidst the pandemic. Some are thriving while others are struggling. They illustrate Somar’s view that, for investment purposes, it’s
to better focus on a bottoms-up business by business analysis rather than top-down macro analysis.

The pandemic has impacted businesses in a highly asymmetric way. Some businesses, like cloud computing or TV streaming are thriving. Others, like Airlines, Tourism and Hotels have come to a virtual stop. While the
current short-term acute impact will ease, there will likely be sustainable long-term impacts. For example, the shift to cloud computing is  accelerating, as is the migration to TV streaming. Our theses are coming to fruition faster than expected and this acceleration should continue past the pandemic.

Many commentators debate whether we will have a V, U, L or any other type of recovery. We believe this misses the point. The recovery trajectory for the average business will mean very little for individual businesses as the dispersion of outcomes will be wide. Some businesses are already operating at a level above the pre-Covid levels. Others may never recover to pre-Covid levels.

In this environment, the winners are the businesses that can quickly adapt to the new reality. This puts huge premium on their operational flexibility and their liquidity. We have conducted a detailed analysis to identify
which of our long investments are in better positions for the new reality. We have increased their weight in your portfolio where the prices were sensible. We have also identified the short investments that have less
flexibility and liquidity problems in the face of disappearing demand and increased their weight in your portfolio where the prices didn’t reflect this reality. The widening divergence of outcomes will be working for you and the other Somar investors.

Given the high market volatility we have been opportunistic on position sizing when appropriate. For example, we have built long positions when the market panics and trimmed or even exited long positions
when the market overreacts on the upside.

We are able to do this because Somar’s portfolio itself is 100% liquid and grounded on business fundamentals.

What Covid-19 will not change
A lot of things will change as a result of the pandemic. Some things, however, will never change. Among them is our belief that the best way to build a sustainable successful business is to delight your customer. At Somar we apply that every day and in every investment decision:

  • Happy consumer – delight your consumer with a superior offer;
  • Thriving business – take market share;
  • Profitable investment – build shareholder wealth.

Our formula has not changed. We have executed it well throughout the pandemic. The world may change but our quest is always to find companies that are delighting their customers, taking market share and building
thriving businesses in whatever the new world order is[1]. We believe our formula will continue to serve us well in the post-pandemic world.

The pandemic has accelerated the realization of our vision. We see an accelerating shift to e-commerce, online food delivery, cloud computing, electronic payments, gaming, TV streaming and other trends we are
invested in. Our longs are accelerating their market share gains at the expense of our shorts. Consumers forced to rethink most of their life choices are attracted to the superior value of our businesses and voting
with their feet.

 

All the best,

Pedro Ramos

 

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[1] On short investments we invert our logic: we look for companies that disappoint consumers, with unsustainable market shares and margins that will lead to declining market value.

 

Disclaimer: This website is for general information purposes only and is not intended to be, nor should it be construed as investment advice, nor a solicitation or offer to buy or sell any securities, related financial instruments, or  interests in the Somar Master Fund, LP (the “Fund”) or its feeder funds. The information contained herein is not complete, and does not contain certain material information such as disclosures and risk factors about the Fund or its feeder funds. Opinions expressed are current opinions as of the date of this material only and are subject to change without notice.Hedge funds: (1) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; (2) can be highly illiquid; (3) are not required to provide periodic pricing or valuation information to investors; (4) may involve complex tax structures and delays in distributing important tax information; (5) are not subject to the same regulatory requirements as mutual funds; and (6) often charge high fees.

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