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Khrom Capital new position... any ideas?


Homestead31
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Excerpt from Khrom Capital's letter available here: http://www.gurufocus.com/news/355992/khrom-capital-june-30-letter-to-investors

 

any guesses what this position could be?

 

We recently made a new investment based on taking this lifetime view of a business. This company is disrupting a large industry; it has only a 0.3% share of a growing market, a clear and increasing competitive advantage, an astute and well incentivized board of directors, and is run by an extraordinarily intelligent CEO who has a clear strategic vision and has created an outstanding corporate culture.

 

However, if our investment strategy focused on trying to estimate what the stock price could be in a year – or even five years – from now, we might have passed on this investment. There are many reasons that the stock price could decline in the near term. Competition will likely increase since the opportunity that this company is pursuing is large and lucrative. The company’s current profitability is depressed, and its CEO will likely continue to suppress it further in pursuit of significant advantages of scale. The U.S. economy may enter another recession, and since this business hasn’t previously proven itself through an economic contraction, there may be panicked sellers of the stock. These and other factors may make for a “messy” stock price over the next few years.

 

However, by encouraging ourselves (and structuring our partnership to allow us) to think as permanent owners of the business, we focused our attention not on the share price this company could trade for in a few years, but on the profits this business is likely to produce over the next few decades. Ironically, the farther out we look, the easier it becomes for us to approximately predict things.

 

Focus on long-term profitability

 

For example, take the risk of competition. We think that this company has obvious and growing competitive advantages that should help solidify it as the dominant player in its space. (Think how the number of search engine startups dried up once Google Inc. (NASDAQ:GOOG) solidified its dominant position.) We think it is ideal that this management is willing to reduce short-term profitability to invest in growing the company’s competitive advantage, increasing the quality of its long-term profitability. (Think how Amazon.com, Inc. [NASDAQ:AMZN] has barely shown any profits for over a decade, but the value of its business has grown significantly every year.) We think that a recession could benefit this company, since their cash-rich balance sheet, economies of scale and prudent management team would enable them to grow stronger as weaker competitors die off. (Think how Wells Fargo & Co. [NYSE:WFC] is earning more money today than before the Great Recession.)

 

In short, since we do not need to concern ourselves with where the stock price will be in the next few years (since you have allowed us to follow an investment strategy that focuses on the fundamentals of a business), we are able to look beyond all the short-term noise. That is how we attempt to generate our excess returns. By taking the profits that people cannot take (and hopefully avoiding the losses that they incur) because they want to rent a stock.

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Guest Grey512

I do not believe this to be Tesla because Khrom's letter references a strong cash position of the business. Tesla's cash position and balance sheet do not look unassailable to me. At the current run-rate, even after the recent capital raise, Tesla might run out of money by 2018.

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Not so sure about paying too much attention to this. One of his previous investments that he touted as a long term buy and hold was SHOS, sears hometown and outlet stores. Compared it to ACE hardware, its franchisee high ROIC model etc. This was before he stopped discussing specific investments in his letters.

That thesis clearly did not play out the way he projected it to do. I suspect he is long out of that investment since it obviously did not seem to hit his returns, but thats difficult to track since I'm not aware of any 13f filing needs since I think he is below the threshold.

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Not so sure about paying too much attention to this. One of his previous investments that he touted as a long term buy and hold was SHOS, sears hometown and outlet stores. Compared it to ACE hardware, its franchisee high ROIC model etc. This was before he stopped discussing specific investments in his letters.

That thesis clearly did not play out the way he projected it to do. I suspect he is long out of that investment since it obviously did not seem to hit his returns, but thats difficult to track since I'm not aware of any 13f filing needs since I think he is below the threshold.

 

Disregarding all future investment ideas because of one bad investment is not very smart. Every single investor in the world makes a lot of bad investments over a career. It's very possible to make a good investment and still lose money on it just like it's possible to flip a coin ten times and get heads all ten times.

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I think Workday checks a lot of the boxes that Khrom mentions in his letter.  Net cash position, current depressed profitability due to growing scale, incentivized board/founder, long term vision not worried about volatility, and disrupting the HR/human capital management industry.  Thoughts?

 

http://www.bloomberg.com/news/articles/2015-08-31/workday-ceo-bhusri-says-tech-bubble-limited-to-private-companies

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