Choice Equities Capital Management LLC, a North Carolina-based investment management firm, released its Investor Letter for the second quarter of 2019 – a copy of which can be downloaded below. The firm was founded by Mitchell Scott in 2017 as an independent investment management company. Scott is an expert in asset and portfolio management, finance, marketing, strategic planning, and valuation. Before founding CECM, he held various roles in several companies including The Kenesis Group, LLC, Edgeview Partners, Anchor Capital, and KDI Capital Partners.
In its recent Investor Letter, CECM reported a -0.5% net performance during the second quarter. The fund’s portfolio had both losers and winners for the quarter.
Markets resumed their upward climb in 2Q with large caps again leading small caps as can be seen in the accompanying performance table. Large caps in the S&P 500 have now posted a gain of +10.4% over the last twelve months compared to a loss of -3.3% for the small caps in the Russell 2000 over the same period. Interestingly, this ~14% divergence in performance now stands at levels just shy of the greatest disparity seen in the last 30+ years. By comparison, our portfolio had both winners and losers in the quarter, netting out to -.5% net performance for the quarter. This latest update now means $1 invested in our portfolio since becoming independent in 2017 is worth $1.49 versus our Small/Large blended benchmark of $1.24.
In this letter, we will highlight the notable performance drivers in the quarter as usual with closer looks at Destination Maternity and Bluelinx. We will then discuss new portfolio addition PAR Technology before closing with a few thoughts on the outlook.
NOTABLE PERFORMANCE DRIVERS
Our lumpy performance continues to be just that, with up and down months this quarter netting out to just under flat performance. Reed’s Inc. and SiteOne Landscaping were the largest positive contributors to the quarter, adding +3% and +2% respectively. SiteOne continues to execute its rollup strategy as it expands on its wide leadership position in landscape supply distribution, and Reed’s shares have performed well this year as management has demonstrated good progress in revitalizing the company’s category-leading brands. We point our readers to our follow up interview with Hidden Value Stocks just last month for a complete update on Reed’s as well as Drive Shack. The interview also contains a deep dive on holding Rubicon Project.
Other small gains were offset by a -3% loss in Destination Maternity (DEST), a position we exited and Bluelinx (BXC), where recent additions into a falling share price detracted -2% from performance in the quarter.
DEST – Regarding Destination Maternity, after the company’s 4Q 2018 report which I described in our last letter, I determined that I wanted to see at least one more earnings report from the company before I made any further decisions on how to manage our position. Sentiment was rotten after the 1Q report featured mixed results and soft margins, but I reasoned the share price gave little credit to an interesting niche brand pursuing an appropriate strategy to capitalize on its value. After an in-depth review of their earnings results, I thought it’d be reasonably likely we’d see stronger gross margins and improving trends in their eCom business in the upcoming quarter, and that investor perceptions could change in a hurry with only a moderate improvement in performance.
Of course, at the time I made this decision, I did not anticipate the market would go through the worst month of retail share performance in the last ten years. I also did not anticipate further changes at the board level that would undermine my confidence in operations underway in the C suite. Real time reads on mall traffic going meaningfully negative would further weaken my confidence in the situation. With these signposts emerging after making the original decision to hold, I began to trim our position in anticipation of upcoming results and cut exposure in other retail names, limiting other losses there to less than half a percent.”
You can download a copy of Choice Equities Capital Management LLC’s Q2 2019 Investor Letter here:
You can also see the list of our 2019 Q2 investor letters and download them on this page.