In a recently published Artko Capital’s Q1 2019 Investor Letter, which you can track downhere, the fund discussed a few companies in its portfolio, among which was Gaia, Inc. (NASDAQ:GAIA). Artko Capital said that it has enthusiasm for the company’s businesses.
Gaia(GAIA) – Our Core Portfolio’s 10% investment in Gaia continued to underperform, down 10% for the quarter. During the 1stquarter earnings call the company announced a shift in strategy moving away from its 1 million subscriber goal by late 2019 at a breakneck 60% subscriber growth rate to a more manageable, profitability focused,30% revenue growth rate, supplanted by price increases and focus on lower cost customer retention(vs high cost acquisition)with expected breakeven profitability by late 2019. The move was meant to placate the market’s concern about Gaia’s cash burn; however, given its sudden shift from a positively upbeat confirmation of previous strategy a few months prior, it had the opposite effect in spooking investors and creating additional uncertainty and stock price volatility.
We are still strong believers in the product and the company business model, as well as its value as a popular content provider with close to 600,000 global subscribers paying $10-12 a month for its admittedly weird but unique content. While we are disappointed at the recent stock performance, we believe that at its current $9 per share price and a $130mm Enterprise Value, that excludes the $30mm to $40mm value of the company’s commercial office building in Colorado, its content library and other hidden assets on the balance sheet,the stock represents a good investment from a risk reward and margin of safety stand point. We have lowered our expectation for 2021 EBIT from $60mm to $30mmand our intermediate term expected price from $60.00to mid $30s. We will cautiously monitor the new strategy rollout;however, we still have significant confidence in the incentivized and experienced management team as well as the significant upside potential in this investment and we look forward to updating you on the progress.
Gaia Inc is a company that offers global digital streaming of science-related videos. It was previously known under the name Gaiam, Inc. Year-to-date, the company’s stock lost 13.43% and on April 26th, it had a closing price of $9.09. The company has a market cap of $162.71 million.
Heading into the first quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in GAIA over the last 14 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Gaia, Inc. (NASDAQ:GAIA) was held by Royce & Associates, which reported holding $6.7 million worth of stock at the end of September. It was followed by Nantahala Capital Management with a $4.6 million position. Other investors bullish on the company included Woodson Capital Management, Renaissance Technologies, and P.A.W. CAPITAL PARTNERS.
The writing was kind of on the wall at the end of March. S&P 500 Index was near the 4600 level whereas inflation rate was close to 8% and the 10-year Treasury yield jumped to 2.7%. The probability of further increases in interest rates and sharp declines in the stock market was much larger than the probability of further gains in stock prices. So, we started telling our premium subscribers to short the market at the end of March. Most hedge funds interpreted the macro developments the same way we did and reduced their exposure. The total value of stock holdings in hedge funds’ portfolios went down from $3.1 trillion at the end of December to $2.8 trillion at the end of March.
This isn’t a terribly large reduction in market exposure, but it is still a reduction. It still shows that hedge funds have a slight edge in market timing.
Insider Monkey has long been a believer of imitating the top stock picks of hedge funds, and this approach has helped us beat the market on average over the last several years.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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