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Pricey Fellow Companions:
The Summers Worth Fund LP (“the Fund”) returned -25.9% internet within the first half of 2022. The small and micro-cap indexes returned -23.5% and -25.2%, respectively. Since inception, the Fund has annualized at 7.1% internet in opposition to the benchmark returns of two.1% and .8%, respectively. The primary half of 2022 was one of many worst begins for the inventory market in 5 a long time.
We carried out barely worse than the indexes, which was a disappointing outcome. The vast majority of our decline befell within the first quarter as we have been too sluggish to react to the Fed’s resolution to extend rates of interest and shrink its steadiness sheet to chill the over-heated financial system.
Portfolio Commentary
The largest contributor within the interval was Natus Medical (NTUS) adopted by our quick place in Oyster Level Prescription drugs (OYST). In April, it was introduced that Natus could be acquired by personal fairness agency, Archimed, for $33.50 per share. The deal was accepted by shareholders in early July and will shut within the third quarter. Our quick place in Oyster Level paid off because the launch of Tyrvaya for dry eye upset lofty investor expectations. We lined our place within the second quarter beneath $4 per share.
The largest detractors throughout the first half of 2022 have been Inotiv (NOTV) and Electromed (ELMD). The notion of a slowing R&D funding atmosphere for small pharmaceutical and biotechnology firms weighed on Inotiv’s share worth. Whereas the funding atmosphere definitely has turn into tougher, Inotiv is extremely diversified with over 3,000 purchasers together with tutorial facilities and different medical analysis organizations (CRO).
Pre-commercial purchasers solely signify 20% of its gross sales combine. Moreover, Inotiv is a market share gainer within the CRO trade because it advantages from its intense deal with the client expertise. As such, we consider the corporate is positioned to climate the storm. We proceed to personal shares of Inotiv; nevertheless, we lowered the place measurement within the first quarter. Electromed’s share worth declined as the corporate has struggled to generate worthwhile income progress over the previous few years.
The corporate has additionally been damage by a sample of turnover on the manager group. We consider that Electromed ought to steadiness its progress aspirations in opposition to shareholders’ need for increased revenue margins and a extra compelling return on invested capital (ROIC) profile.
Our prime 5 positions on the finish of the second quarter included: UFP Applied sciences (UFPT), Utah Medical (UTMD), Electromed (ELMD), Landec (LNDC) and Natus Medical (NTUS). The Fund held eleven lengthy positions in complete together with two quick positions.
The market atmosphere within the first half of the yr was about as tough as we’ve got seen in our 25 years of investing. Excessive threat taking up the a part of buyers led to pockets of severely over-valued shares getting into 2022. Whereas the Fed pivot to extend rates of interest and shrink its steadiness sheet popped the valuation bubble, investor sentiment has not declined to a degree that makes us consider the bear market is close to its finish.
With the yield curve inverted (signaling an elevated threat of recession), we consider {that a} conservative stance is warranted. The subsequent stage of the bear market will most definitely contain decrease company earnings on account of a tougher enterprise local weather and lowered entry to capital. We consider the businesses in our portfolio can carry out properly given the mission important nature of their services, pricing energy, and robust steadiness sheets.
July 2022
It’s attention-grabbing to notice that the present bear market is the third bear market within the 4 years since we launched the Fund. We skilled bear markets in 4Q18, 1Q20, and 2Q22. The fairness markets are unstable, however the cadence of bear markets since our launch is extra frequent than is traditionally regular (each 3-4 years). In reality, the micro-cap index (IWC) ended June just about flat from after we launched over 4 years in the past.
New Thought: Sharps Compliance (SMED) – $57 million market cap
The market sell-off has created engaging alternatives to deploy capital. One such alternative was Sharps Compliance (SMED), the second largest supplier of medical waste disposal providers in the USA. The inventory declined from a excessive of $17.50 in 2021 to a low of $2.80 in June. The corporate was a COVID-19 beneficiary because of the excessive fee of vaccinations that befell however lagged after the pandemic subsided. We had adopted Sharps for over a decade and developed a deep information of the corporate over that point interval.
We by no means owned the inventory till it just lately traded beneath $3.00 per share. We believed the inventory was undervalued buying and selling at .5x EV/Gross sales and 1.7x EV/Gross Revenue. Sharps had internet money of $23 million, which represented 40% of the market cap. The enterprise had its ups and downs over time, but it surely operated largely worthwhile and didn’t require further capital.
The catalyst that actually piqued our curiosity was when the corporate named Pat Mulloy as CEO on April 4. Mr. Mulloy was a board member, and he was tapped to steer the corporate after it parted methods with long- time CEO, David Tusa. Mr. Mulloy had a profitable monitor report within the long-term care trade the place he led a number of firms earlier than becoming a member of the Sharps board.
We did a name with Mr. Mulloy in Could and believed that the enterprise could be operated at the next stage below the brand new management group. The sell-off within the inventory worth was exacerbated by its deletion from a number of indexes in June together with promoting from the previous CEO. Our relative valuation work in contrast Sharps to the trade chief, Stericycle (SRCL). This evaluation indicated a goal share worth within the $8-10 vary.
We amassed a ~1% place earlier than it was introduced on July 12 that the corporate could be acquired by a non-public fairness agency, Aurora Capital Companions, for $8.75 per share or a 207% premium. The deal is predicted to shut within the third quarter.
In Closing
I want to thank these restricted companions who added to their accounts throughout the second quarter. I’m extremely grateful to have such an incredible group of restricted companions invested within the fund right now. I’m actually honored to speculate your loved ones’s capital alongside mine. Our technique continues to have ample capability, and we search like-minded people to hitch the partnership. events can attain out to me immediately at [email protected].
Sincerely,
Andrew Summers, CFA Managing Companion | Summers Worth Companions LLC | [email protected] | www.summersvalue.com
1Summers Worth Fund LP internet return is the unaudited, internet return, primarily based on a hypothetical investor who invested at fund inception and pays a administration charge and incentive allocation relevant to Class B Pursuits (1.25% administration charge; 20% incentive charge above a 6% annual cumulative hurdle fee). Internet return shouldn’t be essentially indicative of any single investor’s efficiency. An investor’s return might range from the outcomes proven primarily based on completely different charge buildings and fund-level bills. The efficiency info given is historic and shouldn’t be thought of as a sign of future efficiency. Efficiency displays the reinvestment of dividends and revenue. |
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