In a recently published Alta Fox Management‘s Q1 2019 Investor Letter, the fund shared its views on several companies in its equity portfolio and shared its performance figures. You can download a copy of its letter here. It disclosed the quarterly return of a high 28.10%, outperforming its benchmark the S&P 500, which generated a return of 13.65%. It also disclosed its since inception return which turned out to be 36.63% net, compared to 9.50% for the S&P 500 in the same period. Among the stocks discussed in the letter was RumbleON, Inc. (NASDAQ:RMBL) which was actually the stock in the fund’s portfolio which brought the most losses, negatively contributing to the fund’s performance.
“RumbleOn, Inc. (RMBL)
RMBL has been the biggest loser for the fund since inception—contributing 268 basis points of negative return.
I initiated a position late last year. The story was exciting on the surface: two auto-industry veterans leading a micro-cap company with sales growing triple digits and a competitively advantaged online motorcycle platform business with strong network effects.
The company released disappointing Q3 results and provided weak Q4 guidance that were well below expectations and at the same time announced a transformative acquisition, which put the company in the automotive car wholesale business. The company was also planning to launch an online classifieds business. The stock fell ~50%. It was a somewhat speculative position at the time and sized appropriately, but a 50% move down is always painful.
I doubled my research efforts on the company to assess whether this was a hiccup in an otherwise exciting growth story or a thesis-breaking event. I visited the company’s headquarters and met with the CEO. I spoke with the CFO several times. I analyzed their various business lines independently and tried to understand whether the market was misunderstanding the acquisition that was completed and the potential upside. My initial conclusion was that while there were still many uncertainties and risks, the market was not valuing the company’s three different segments appropriately (legacy motorcycle business, car wholesale and logistics business, and the company’s online classifieds business). I published a 60+ page slide deck outlining the considerable research I did on the company.
Less than a week later after publishing the slide deck, the company filed additional information about the financial profile of their acquired companies and announced an equity raise. This was thesis-breaking and I exited the position immediately.
What changed? First, management credibility. There was always a question as to whether the CEO and CFO of this company were true value creators and visionaries in the industry or whether they were just pretenders and looking for shareholders willing to finance their experiment. When the CFO repeatedly tells investors there is no near-term need for a capital raise and then does a capital raise, it damages credibility. The company also badly missed its own sales guidance multiple times as well as estimates for growth in their classifieds business. Second, the company’s proxy statement provided enough information to back into the sales performance of the company’s initial legacy motorcycle business, which was well below expectations.
Fundamental investing is often an exercise in patching together the correct narrative from a series of facts and financial figures. For a company like RMBL early in its lifecycle trying to disrupt a massive market with technology, forming that narrative is not easy because there is not a long operating history or great comparable companies. This makes the incremental data points and execution by management even more important. For RMBL, the incremental data points have been negative and the company’s execution and credibility have suffered. I think management’s initial legacy motorcycle business was not scaling as profitably as they hoped and they decided to shift gears and divert attention away from that underperformance by acquiring a large amount of revenue within a competitive automotive wholesale business. On the last conference call, RMBL management discussed aggregate performance instead of providing the necessary details to parse out what I can only assume was very weak results in their legacy bike business.
The management of RMBL may succeed and successfully disrupt large legacy players in the auto market, but with significantly negative cash flow, a pattern of overpromising and underdelivering to investors, and a constantly shifting business model, it is not a company I can support. I think good investors change their mind when the facts change. With RMBL, the facts changed quickly and we exited our position. While the loss was meaningful, it is still very small relative to our biggest winners and is consistent with our strategy of cutting our losses quickly when a thesis is not playing out as expected.”
RumbleOn, previously known as Smar Server, Inc. is a technology company that provides an e-commerce platform for easier buying, selling, and trading of motorcycles, mostly focusing on pre-owned Harley-Davidson motorcycles. Year-to-date, the company’s stock lost 9.15%, and on May 8th it had a closing price of $5.16. Its market cap is currently of $108.81 million.
At Q4’s end, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 500% from the second quarter of 2018. On the other hand, there were no hedge funds with a bullish position in RMBL a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Wilmot B. Harkey and Daniel Mack’s Nantahala Capital Management has the largest position in RumbleOn, Inc. (NASDAQ:RMBL), worth close to $8.8 million, corresponding to 0.3% of its total 13F portfolio. The second largest stake is held by 683 Capital Partners, led by Ari Zweiman, holding a $1.4 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining peers that are bullish encompass Christian Leone’s Luxor Capital Group, Jack Ripsteen’s Potrero Capital Research and J. Carlo Cannell’s Cannell Capital.
This article is originally published at Insider Monkey.