Dear investors and well-wishers,

The fund declined -12.5% in June. There has been a decent rally in July so far.

Early on in this sell off I wrote that our stocks had roughly doubled in size and halved in price. Since then many of them were cut in half again, with the bulk of that happening over the last three months.

The kinds of companies we like were punished severely in this market. We back fast-growing challengers over incumbents, companies investing in the future rather than harvesting cash today, and focus on companies with devoted consumer backing. Many hard hit companies have continued to grow strongly while their values have languished. The very same factors that have been so penalized this year are the same ones that we expect will lead these companies to outperformance in the future.

Quality hasn’t counted for much. To give one example, Beyond Meat is trading at 5x EV/Sales, grew at 1%, reported a 0.2% gross margin, and is down 73%. There’s a long list of high quality growth businesses that are down as much or more, are significantly profitable on a net income basis and growing substantially faster, that are trading at cheaper levels and have fallen more this year.

In our sectors, no matter how you cut it, the value points reached in May and June were exceptional.

There’s a hierarchy of valuation metrics, from sales, to gross profit, to EBITDA, EBIT, profit after tax, then free cash flow yield. A balance sheet approach might look at asset replacement value. At the moment you can simply use net balance sheet cash. A number of companies in the life sciences traded well below this, even with FDA approved products.

It wasn’t just life sciences, the number of Russell 3000 companies trading for less than net cash exceeded March 2009 and the lows of 2002.

One company we owned traded from ~$8 at the beginning of the year, to $4 in June, pending an FDA decision which was constantly delayed. In June the FDA approved their drug, conditional on a patent expiring next year, and the stock promptly collapsed to ~$1.

With $2 of cash and all-but-approved drug that physicians in the field were desperately waiting for, this was a strange move that came at an unwelcome time for us in June.

Only a few weeks later the stock rallied to just under $5 today, and is likely worth several times more, though ofcourse revenues and profits will have to wait until next year.

This kind of price action is an example of why we have found the current environment so difficult.

It’s now our primary focus to find the best opportunities in the wreckage, of which there are many.

The COVID crash felt intense, but many companies retraced their whole COVID upwards move, then did the COVID crash all over again.

The difference is that this time, with some notable exceptions, the companies are far larger and have made substantial progress over the past two years, and so the value point is far greater.

On the back end of 2002, when many considered the tech sector a dot-con, tech rallied for almost two decades. After the GFC, when everyone was looking for the next big short, US stocks rallied with barely a hiccup all the way to mid 2018 (coincidentally when I launched this fund, which has now seen three consecutive sell-offs of increasing severity.)

Unlike leveraged oil and gas companies several years ago, or financial companies in 2008 and 2009, the vast majority of tech companies are cash flow positive, have no net debt and are going to survive and grow throughout this period.

These companies don’t need to rally anywhere near their peak multiples to reach new heights.

For the first time in a while momentum seems to be creeping back into the sector, with companies stabilising and for the first time trending upwards.


The genesis of the strategy was years ago when I bought Apple over a decade ago and Tesla about nine years ago, in both cases judging that the consumer love and strong growth was by far the dominant factor and going to lead to years of growth. Notably each company was charging far more than competitors, had clearly superior products, and was selling out of products as they launched.

But I traded in and out of both those companies multiple times, last selling Apple in 2018, for example. These companies were hit disproportianately hard in every sell-off, only to quickly regain lost ground and push to significant new highs as their fundamental growth powered on.

So I was determined to sit still and fully capture the upside in companies that we got right, taking the long term approach common to many investors with the strongest long term track records.

This was largely why we sat still over the last year and a half. Looking back, the reason we didn’t sell out of core holdings that were up 5-10x was that in many cases the companies themselves had increased in size by a similar amount. And are still growing today, though the prices of many are down 75-80%.

We know that the right growth companies can generate extraordinary returns on the back end of sell-offs like this, whether you look at 2020, 2018, 2016, 2009, or 2002 when many companies went up orders of magnitude after the lows were in.

The same characteristics – fast growth and immense demand even in consumer recessionary conditions – are present in our portfolio companies today.

1973-1974, described as a ‘mud-slide’, was marked early on in the piece as a close comparable to the current situation with war, an energy crisis, and high inflation, compounding to form the worst S&P500 bear market since the Great Depression. Some indices, notably the United Kingdom, dropped ~70%, and the S&P500 roughly halved.

The early 1980s also saw high inflation and even higher interest rates, which caused a two year bear market. The S&P500 then, as now, was focused on the largest US businesses, so small caps fared worse.

1973-74 marked a generational low

1987 looms large but this was more like a COVID crash – a clearing of positions followed by 13 year rally.

Notably in the 1990s there were multiple periods of rising rates that didn’t cause a crash or extended bear market.

Recoveries after sell-offs are often swift. This bear market has already significantly exceeded the prior inflationary bear market of 1980-1982

We have been sharing indicators that reached extremes. These were misleading earlier in the year, but for the first time growth stocks have started to show positive momentum.

The move in positioning and sentiment has largely been done.

Not necessarily a timing tool – this has been flashing for much of this year – but at the very least cash balances indicate where future demand might come from

Cyclicals and commodities have unwound in the last several weeks. If you bought energy services at any time after the Ukraine war, for example, you are now underwater.

Surprisingly oil and gas equipment and services below where they traded after the breakout of the war in Ukraine. 


To give one example of how the factors that will make future long term winners are being particularly punished right now, Disney has been amongst the worst performing stocks in the S&P500 for the better part of a year. The company traded back to where it was in 2015, and is one of many that retraced the post COVID rally, then basically did the COVID crash all over again.

Only this time, the company’s parks are open, and the firm has 137 million new subscribers to Disney+, transferring cash directly and silently from their credit cards to Disney’s corporate account every month.

Building businesses like this can’t be done for free. It requires investment, which is strictly out of favour today. But over the coming years this direct customer relationship will be an incredibly valuable asset.

Disney has pricing power across its businesses and just raised prices for ESPN by 43%, from $6.99 per month to $9.99. As of a few weeks ago, Disney’s drawdown reached 55%, which is similar in magnitude to 2008-2009 (-58%) but admittedly not quite as large as 2000-2003, which topped out at 70%.

This kind of sell-off would usually suggest a shrinking, struggling business, not one raising prices, with a new direct monthly revenue stream from over 130 million fans.

Over the last year and a half the dominant factor across our portfolio has been severe multiple contraction, in many cases over 90%.

At some point this multiple contraction will stop and we expect our companies at the very least to start growing in line with their fundamental growth.

I’m asked how I’m changing the strategy to make sure we never go through a drawdown like this ever again.

This fund has been running for about four years from mid 2018, and we’ve seen three consecutive sell-offs of increasing severity, and to be fair, one broad rally which lasted less than a year.

The nature of our strategy means that our companies attract a lot of hot money flows, from retail investors, trend following algorithms, and professionals chasing the extra returns that (usually) come from fast-growing companies.

In the future we’ll better monetize these flows, and make sure when markets are running hot – which is almost unimaginable now but will happen again, and perhaps sooner than anyone expects – that we don’t get caught fully invested and distribute any excess returns that come from speculative exuberance.

Now those lessons are less useful. Of the companies that are down 75-80% and are trading at lifetime lows, we know some are like Beyond Meat – profitless, growthless, and facing more not less competition. We also know which companies are growing, adding users, have defensive and unique positions in their ecosystems. And perhaps the good ones are continuing to invest in sales and marketing, but they’re getting decent return for it. At the moment the dispersion between good and bad seems to count for little, and it’s all moving together (and this year, until recently, mostly down).

There are early signs that parts of the market have bottomed. Biotech seems to have put in a low recently, and perhaps Aussie small caps too. Typically markets bottom several months before recessions end. We’ll find out later this week if the US has been in one since the start of the year, as some early estimates suggest.

It’s true that large caps are not as cheap as they were in the GFC lows or 2002. But in our sector, by the simplest measure of companies trading below cash, this has been worse than both instances.

We are looking at companies that have maintained >100% EPS growth for multiple years trading on 10% free cash flow yields. We’re working on a mid cap company growing at 30% trading on a PE of 5 and forward free cash flow yield of ~15%.

We own three companies with approved drugs that traded below cash and have now rallied strongly from the recent lows.

Finally, stocks across our portfolio and our coverage are showing positive momentum, crossing trend lines and moving averages for the first time since the beginning of the year.

A swallow doesn’t make a Summer, and we were too optimistic earlier in the year only to get hit with a substantial leg down in equity prices over the last three months.

Michael Frazis


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