RF Capital released its Q3 2019 quarterly letter to investors – download a copy here.
The investment management company did not have a good quarter, losing 6.98% in value. Meanwhile, the benchmark Russell 1000 Growth Index and the S&P 500 Index gained 1.49% and 1.87%, respectively.
In its commentary, RF Capital had the following to say on Fiat Chrysler Automobiles NV (NYSE: FCAU), one of the company’s top 5 holdings:
“We believe Fiat Chrysler remains undervalued. The low earnings multiple is due to poor performance in China as well as the US-China trade war. Although Q2 profits were up compared to last year, shipments were down. The Street is concerned about [the] growth in North America and FCAU’s struggles in Europe. Old products in Europe need to be refreshed (the average product age is over 7 years), and there is also regulatory difficulty with 2021 CO2 compliance. However, management reaffirmed their 2019 guidance of $2.98 adjusted diluted EPS and $1.65 billion industrial FCF.”
Fiat Chrysler was in 28 hedge funds’ portfolios at the end of the second quarter of 2019. FCAU has seen an increase in enthusiasm from smart money recently. There were 27 hedge funds in our database with FCAU positions at the end of the previous quarter. Our calculations also showed that FCAU isn’t among the 30 most popular stocks among hedge funds. Mohnish Pabrai has been very bullish about FCAU and successfully generated mid blowing returns from its FCAU investment over the years, but he is now looking to sell down his position in the stock and invest in other more promising ideas.
Apart from FCAU, the investor’s top holdings include Foot Locker (NYSE: FL), Aimia (TSE: AIM.TO), and Zagg (NASDAQ: ZAGG).
RF Capital also initiated a position in GameStop Corp. (NYSE: GME) and had the following to say on the game retailer in its letter:
“Gamestop is a video game retailer with over 5,700 stores across 14 countries. GME offers new and used video gaming consoles, video games (both physical and digital), accessories, collectibles, and other miscellaneous items. Customers are able to trade in consoles, games, and accessories for cash or store credit through GME’s buy-sell-trade program.
GME also publishes Game Informer magazine. The business is currently challenged due to the rise of digital downloads, competition from other retailers, and increased gaming on mobile and computers. Furthermore, earnings will continue to suffer until Q4 2020 because the industry is currently at the end of the console cycle. (Sony and Microsoft will be launching new consoles next year in Q4.) Although sales and earnings have been down significantly, at least we are seeing trough earnings or somewhere close to it. Despite all the negative press around GME, we believe the situation looks worse than it actually is. The company has a strong balance sheet and continues to generate free cash flow. GME currently has $424 million in cash versus $418 million in long-term debt.
Management has also projected adjusted diluted EPS of $1.15-$1.30 and adjusted FCF of $225-$250 million for 2019. Thus, GME should be able to stay afloat while waiting for the release of the next-gen consoles. We made GME a 5% position. Our average cost was $5.30 per share. At this point, GME is difficult to value based on earnings. However, the strong balance sheet provides downside protection, and there will be more visibility when the new consoles and product titles launch next year. We will increase our position size if management continues to do the right things. The new CEO and CFO are off to a good start with 180-200 planned store closures and the completion of the modified Dutch auction tender offer for 12 million shares at $5.20 per share.”
Our calculations also showed that GME isn’t among the 30 most popular stocks among hedge funds. Famed short seller Michael Burry is actively investing in GME. Several insiders also purchased GME shares in large numbers in September and all of those purchases are in the money now. We took a detailed look at GME in the previous issue of our premium monthly letter.
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