Artko Capital 3Q 2019 Partner Letter
For the third calendar quarter of 2019, an average partnership interest in Artko Capital LP returned 7.9% net of fees. At the same time, investments in the most comparable market indexes—Russell 2000, Russell Microcap, and the S&P 500—were down 2.4%, 5.5%, and up 1.7% respectively. For the first 9 months of calendar 2019, an average partnership interest in Artko Capital LP returned 36.9% net of fees, while investments in the aforementioned market indexes were up 14.2%, 7.9%, and 20.0% respectively. Our detailed results and related footnotes are available in the table at the end of this letter. Our results this quarter came from broad portfolio contributions from Ecology & Environment, Command Center (Hire Quest), NRC Group Warrants, Repro Pharma, Spartan Motors, and Sharps Compliance while a modest pullback in Research Solutions detracted from the overall performance.
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Peter Rabover
Portfolio Manager
Artko Capital LP
October
2
2
, 201
9
Dear Partner,
For the
third
calendar quarter of 201
9
, a
n average
partnership inter
est in Artko Capital LP
returned
7
.
9
%
net of fees. At the same time,
investment
s
in the most comparable market indexes
—
Russell 2000, Russell
Microcap, and the S&P 500
—
w
ere
down
2
.
4
%,
5
.
5
%, and
up
1
.
7
%
respective
ly.
For
the
first
9
months of
calendar 201
9
, an
average
partnership
interest in Artko Capital LP returned
36
.
9
% net of fees, while
investments in the aforementioned market indexes were up
1
4
.
2
%,
7
.
9
%, and
20
.
0
%
respectively
.
Our
detailed
results
and related footnotes
are available in the table at the end of th
is letter.
Our results this
qua
rter came from
broad portfolio
contributions
from
Ecology & Environment
,
Command Center (Hire
Quest)
, NRC Group Warrants, Repro Pharma
, Spartan Motors
,
and
Sharps Compliance
while
a modest
pullback in
Research Solutions
detracted from t
h
e overall performance.
4Q18
1Q19
2Q19
3Q19
YTD
1 year
3 year
Inception
7/1/2015
Inception
Annualized
Artko LP Net
-27.1%
10.3%
15.7%
7.9%
36.9%
-0.2%
11.2%
71.7%
13.6%
Russell 2000 Index
-20.2%
14.6%
2.1%
-2.4%
14.2%
-8.9%
8.2%
28.9%
6.2%
Russell MicroCap Index
-22.1%
13.1%
0.9%
-5.5%
7.9%
-16.0%
5.3%
14.3%
3.2%
S&P 500 Index
-13.7%
13.7%
4.3%
1.7%
20.0%
4.3%
13.4%
57.5%
11.3%
On
Th
e MicroCap Capacity Problem
and Partnership Goals
As we are into our fifth year of managing
the
partnership we
ar
e
excited
with how far
we have
come in
growin
g the partner
base and in the performance of portfolio
,
as well as the potential upside we see in
our
portfolio
investments today. However, as our partnership
has
grown
, with expectations of more
partner
growth in the
intermediate
future,
we have
needed to reflect on how we got here and wh
at we
can do to
avoid falling into the sizing out trap
in which
some of our investment management counterparts
occasionally
end up
.
It is important to note that
our most successful investments o
f the last few years
,
that account
ed
for a significant p
ortion
of our past returns
,
such as US Geothermal, Ecology &
Environment, Joint Chiropractic, National Research Corporation B shares, Research Solutions, USA
Technologies
and Skyline Champion
,
came fr
om companies whose
initial
market capitalization
s
ha
ve
been
in
the
sub $100mm
market cap
range.
That is no accident.
According to the venerable Roger Ib
b
otson, a Yale professor and CIO of Zebra
C
apital
who examined the
performance of 3,500 stocks between 1971 and 2017
,
the lowest size and liquidity stocks produced the
highest returns, as seen in the table on the next page,
with lower volatility than even the bigger
capitalization
and
higher
liquid
ity
co
unterparts.
The smallest
capitalization,
most illiquid
,
investments
have
produced a
geometric
annualized return
mean of over 16%
.
This is not unlike our experience with
our typical portfolio companies whose liquidity profiles often resemble
those of
privat
e equity
investments
rather
than a
n average
public
ly traded
company
(though of course we have to follow the
mark
-
to
-
market accounting rules unlike our private equity counterparts).
While we will still
occasionally
invest in a lu
crative large cap that meets our return hurdle or even short
a few
,
the
main
fishing pond for
our partnership is likely to continue to be in the illiquid microcap range given their
high
potential
return
profiles
.
T
he natural question that pops up
of course
is
:
if the returns are so good why
is
everyone else
not
doing this?
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The short answer is
a dearth of institutional investor presence in the space.
But once again
,
why?
A simple
answer:
money. Investment management companies like to m
ake
a lot
money
by growing through scale
and their investors
do not
like to lose money
or hav
ing the appearance of losing money by having
it tied
up in illiquid
, mark
-
to
-
market
securities
.
T
hose two things tend to lead to
most institutional investors
avoiding the smallest co
rners of the stock market.
Here is
a
short math
example to illustrate this point.
One o
f the reasons
we have
outperformed
the market this past quarter was due to the buyout of one of
our Core Portfolio holdings, Ecology & Environment (EEI)
. At the time of our purchase, last year, the
company was a $50mm
market capitalization
company
with
an average of
8
,000 shares
that
trade
d daily
at $
12
.
0
0
,
or about $
10
0,000
of volume a day.
S
ay
an
institutional
investment fund
want
ed
to buy $2
.5
mm
worth of
EEI
stock (or
5
% of the company
, the cut off for having to report their holding
pu
blicly
) and
the
fund
does
not
want to move the price too much so
they
can only buy $15,000 to $20,000 a day
.
U
nless
the
fund
is
lucky enough to get a block trade
,
i
t
would take
them
1
25
trading days
or close to
6
month
s of
daily trading
to reach their desired position
. Getting out of it would likely take
them
even
longer. And that
is
only
for a $2
.5
mm investment!
This effort would be even more difficult if the company is closely held
(hopefully by management).
Working backwards the next logical question is: how big do
es the investment
fund
want this investment to
be as
a
part of
their
portfolio? If
they
want to own
100 microcaps at
an
average
1%
of the portfolio allocation
each, as many
microcap
funds do, then
the
fund capacity is $2
50
mm
but then
they a
re faced with the problem of overdiversification and needing a large and expensive
research
and trading team.
Additionally,
after
they have
completed all the due diligence and research
and
are convinced this stock is a multi
-
bagger the most
their
i
nvestors can make on
all
their
hard work
at the
higher end of the range
is 1%
-
2
%.
This j
ust
does not
seem like it
is
a
high return, worthwhile effort
for all
the research and trading work
they would
have
done
, and the liquidity risk
they w
ould have
take
n
on.
Most of the
larger institutional funds will agree and will tend to avoid looking at something like
EEI
or
,
if
they do
,
will
own it as a
very
small part of their portfolio
. Additionally, they are likely to have a liquidity
mandate from their own
institutional
investors
, whom our own fundraising experience can attest to, really
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(
really
)
dislike being illiquid in
a
public
equit
y
investment vehicle
.
Of cou
rse,
this is all on the margin, i.e.
it
i
s not that there
are not
smart institutional investors willing to invest in something like a
n Ecology &
Environment
in size, it
i
s that there
are not
enough
of them
to create an efficiently priced market in the
security.
So
,
where does that leave us, a
partnership
that likes to have
the top
10
securities represent
at least
80%
of its portfolio
,
with a median market cap of a $120mm
,
and
with at least 40% of the portfolio in sub
$100mm market cap companies?
We have
undertaken
a
strategic
partnership
review this past quarter,
speaking to a number of stake holders and industry professionals
, a
s to what the partnership should look
like in the futur
e, with respect to asset and
LP
capacity as well the
potential
size of the research team.
We
have
always promised you that we would do a hard cap on new assets at $50mm but given the source of
ou
r returns over the years and our desire to remain a concentrated portfolio manager
we have
decided
to lower the hard cap of new money to $35mm with capital returns beginning at around $6
5
mm. We
believe, given our average partner
commitment
at around 4 years,
at those sizes
we would still be able to
invest in companies like
US Geothermal
and Ecology & Environment
,
at sub $60mm market capitalizations
,
in
concentrated
portfolio
proportions
without having to compromise our process or length of
our holding
periods. Additiona
lly, as
we
approach close to 50 limited partners, it is likely our capacity for managing
the partner
ship limited partner base is somewhere around
100 partners, with an expectation that the
time no longer spent on fund
raising would be dedicated to maintaining the operations needed to manage
a partner base o
f
that size. Finally, we believe at that size we would be able to hire another
full
-
time
analyst, as our current part time analyst, Alan Van
Pelt
,
has been an
invaluable contribut
or
to our research
process over the last year
,
both from research and new idea flow perspective.
Our goal
is
to reach these
objectives within the next 18 to 24 months and we look forward to updating you on the progress.
Core
Portfoli
o
Additions
•
Flotek
(
FTK
)
-
We
added a
10%
Core Portfolio
position in
the $
110mm market cap oilfield services
chemicals provider
,
at an average price of $2.0
4
this past quarter.
We have
kept an eye on Flotek
for
close to five years now
and felt this past quarter
’
s 35%
stock
price drop to below
the levels
where the
company’s
implied
market capitalization was at
100
% of its net cash levels,
7
0% of its net working
capital value, and almost 6
5
% of our estimate o
f liquidation value
,
was a good entry point
with respect
to having a decent margin of safety
. Flotek has undergone some challenges over the last 5 years as an
investigation by a short seller we respect, John Hempton
of Bronte Capital
, revealed the company’
s
Complex Nano Fluid (CnF) product that enhances
oil and gas well production, was
,
in fact
,
too good
to be true. This has certainly lead to some soul searching within the company, as it lost customers and
a key
distributor
;
sold
business
segments
;
turned over
the old
,
and hired a new, technically oriented,
sales force;
gained a very respect
ed
chairman of the board in David Nierenberg
,
who
has a significant
financial stake in the company
;
reformulated its
CnF
product
from
a
one
-
size
-
fits
-
all approach
that
originally
got it in
to
trouble, to havin
g
many
different varieties that are more targeted toward
geological well composition, with over 70 pending patents
,
in addition to the 70 it already holds.
This past year the company sold its Florida Chemica
ls business to Archer Daniels Midland for a
$175mm and paid off
all
their debt. As of the end of the 2
nd
quarter the company had $9
8
.
2
mm in
cash with an additional
$15.4mm in escrow pending working capital adjustments
as well as
another
$46mm in oth
er net
working capital.
T
he company
also
owns
approximately $40mm of land and
buildings offset by $18mm in capital lease liabilities,
an
d for now we do not
ascribe
any
value
to
the
company’s Intellectual Property (IP), listed as a gross $18mm on the balanc
e sheet. In other words,
the market is saying
to the company
“
you have almost $200mm of somewhat liquid assets on the
balance sheet
, with over half in cash, and we think you will lose $90mm of it in short order.” While
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almost anything is possible, th
is
is
not probable. However, it is important to note why the market
believes
it to be true
.
This past quarter the company reported approximately $35mm in revenues, for an annual run rate of
$140mm, and warned that third quarter revenues could be worse. The
first
problem of course is that
on a trailing
twelve
-
month
basis
the company ne
ed
ed
$180mm in revenues at
its most recent
cost
structure to breakeven.
Certainl
y,
a tall order for a company in the very cyclical energy sector that is
facing slowing global oil demand and has somewhat of a credibility problem. The company has
undertaken
a
significant cost cutting initiative and is transitioning to a “pay for performance” revenue
model (signaling its confidence in the
newer versions of its CnF product suite). Having said that, it is
possible
the company could burn through another
$30mm
to $40mm
in cash over the next couple of
years as a result of external and internal pressures. The second problem, which was mostly
responsible for the 35% stock drop last quarter, was that the market was expecting the company to
return its significa
nt cash balance to the shareholders via a share buyback or a special dividend.
Instead, the company’s strategic committee not only decided to keep the cash but announced it was
interested in opportunistically buying other distressed oil services companies
on the cheap
during the
energy
cycle downturn. In our experience, unless you are Danaher with a Danaher Business Systems
(DBS) acquisition strategy as part of your company’s DNA, the market absolutely hates acquisition
-
based capital allocation strategies
.
We are
somewhat ambivalent on this topic. On the surface,
layering your existing cost structure with additional profitable revenues complimentary to your
product suite at cheap acquisition prices is not a bad move, especially with an experienced an
d
incentivized capital allocator like David Nierenberg in charge. Additionally, as the company tries to
get into the Enhanced Oil Recovery (EOR) segment with its CnF product suite, adding a partner with a
logistical infrastructure to service wells multipl
e times a year, versus the current one
-
time well
completion visit revenue model, is strategically desirable. On the other hand, acquisition strategies in
cyclical industries have incredible execution risk
, as
we have
seen
firsthand
with Hudson Techno
logies’
acquisition of Airgas’s refrigerants segment a few years ago,
so maybe there is something to the
market’s message to the company.
So
,
how do we look at this investment?
This is the part where we take off our security analyst hat and
put on our portfolio manager hat and take a
bird’s
eye view of the situation. At current prices, we
believe the market is pricing the extreme versions of the scenari
os
we have
discussed above. The
company could continue to bleed tens of millions of dollars in cash, the energy downturn could persist
longer, the product is once again not that good,
company destroys significant value through an
acquisition and a fe
w years from now it is left with $
30
mm in cash and $50mm to $70mm in other
saleable assets and a money losing business that is better off being shut down than to continue
running, where we could end up with a 10
-
20% permanent capital impairment loss even a
t these
levels.
Presumably a financially incentivized board with a fiduciary duty to shareholders would pull
the plug before this happens.
We believe at these prices we are well compensated for this risk and in
return we are getting free optionality on a
number of potential positive external and internal scenarios
within the next
few
years
such as a return of stronger oil and gas markets; CnF product
and the new
technically oriented
salesforce
being as good as management claims it to be and receives custom
er
recognition in form of higher revenues as a result; a
profitable
revenue layer acquisition and further
cost cutting efforts create
sustainable
profitability for the company; at
the current stock
price the
strategic committee changes its mind and initiat
es a share buyback; a successful sale of the company
at a price higher th
an the
zero value the market assigns to it today and so on.
In a nutshell, Flotek
represents the type of investment we
tend
to
get excited about: a
stock
with extreme negative
sentim
ent, industry and
company specific
; with low permanent capital impairment risk, high
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uncertainty and free optionality for potential returns in the 100s of percent from these levels. We
look forward to seeing what happens over the next few years
with this i
nvestment
and updating you
on the progress.
Cor
e
Portfolio S
ales
•
Leaf Group
(
LEAF
)
–
In the first quarter of 2019 we wrote to you that
we
increased our position in Leaf
Group in the hopes that a value unlocking transaction could
provide a reasonable return for our
portfolio.
W
e
kept a close eye on the position, th
e
competition
,
site
traffic flow and the tech
industry’s
transaction markets
.
Unfortunately, w
e saw negative news on all fronts
, especially the rapid
deterioration of the company’s e
-
commerce business, Society 6,
and realized our handicap
ped
estimate
of a
value of a
potential transaction and the return we were expecting were not i
n line with
the information we were
seeing
and
we have
decided to sell the entire
8% portfolio
position at
an
average of
$7.20
per share
, a price
for which we are pretty grateful
for
in hindsight
. In the end, we
made a
modest profit on the position in the 3 years
we
held it
,
on our average
cost
, and avoided the
subsequent
6
0% drop in the stock price
;
however, this was clearly a disappointing result.
T
he
company’s CEO Sean Moriarty succumbed to the same “I want
to be an empire builder” disease
*
that
afflicted the CEO of USA Technologies (USAT) Stephen Herbert. Instead
of selling the businesses at
the high multiples the markets were offering a few years ago, the CEOs decided to do secondary
equity
offering
s
,
unne
cessarily
dilute the shareholders
,
and make questionable acquisitions
that resulted in
significant shareholder value destruction.
*
We will of course note that these are also surface similarities to the Flotek story
we
discussed above,
though we beli
eve both LEAF and USAT
were
missing
some of the
key ingredients
that make Flotek a
much more
compelling
portfolio allocation: a financially incentivized board; a cheap
er
margin of
safety price; and a strong, undiluted, balance sheet.
•
Skyline
Champion
(
SKY
)
–
We have so
ld our entire 9% position in Skyline Champion at close to
$30.00
per share during the quarter. This was a great investment for us,
from
timing
and absolute return
perspective
, in initiating
a position
prior to the
Champion Enterprise
merger at around $12.
5
0, adding
after
the merger
announcement
at $2
1
.00, and even more adds during last year’s market tantrum in
the 4
th
quarter in high teens.
We
are
still fans of the story
and the company
, but felt the remaining
upside
was no longer meeting the return hurdle to remain a large
portfolio
position and the seemingly
never ending insider sales by management gave us a big cause for concern.
We are
going to keep an
eye on the story and may
re
-
enter
at lower prices
if the
market gives us an opportunity to do so.
Enhanced
Portfolio S
ales
•
USA Technologies
(
USAT
)
–
We
sold our remaining 4% position in USA Technologies at around $7.00
per share
, from last year’s sub $4.00 purchase price,
upon the announcement that the
company would
not be able to meet its NASDAQ filing deadline
,
leading to
the
stock
’s
delistmen
t from the exchange.
We are
still curious about the
company
, especially with Hudson Executive Capita
l building up its
already significant
ownership stake
to 16%, a
nd calling for significant changes, including firing the
board and the CEO. However, while we
certainly agree with Hudson’s position on much needed
changes at the company, given the finally released financial
statements
which showed sub
par
performance in growth and profitability and an incredibly onerous and unnecessary financing, we
believe there
is not
much additional value remaining past the current $7.00 stock price.
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Other Portfolio Updates
•
Ecology & Environment
(
EEI
)
–
In
August 2019
,
Ecology & Environment announced that WSP Global,
a Canadian consulting company, offered a total consideration of $15.50 or approximately $67mm, to
buy the company. Additionally, there was a 30
-
day “go shop” provision where the company could
po
tentially receive higher offers from interested suitors, which
unfortunately
expired at the end of
the quarter with
out
those
other offers. Th
e offer
was over
a
50% premium to the company’s trading
price and approximately 40% over our average cost, which
we have
lowered by continuously adding
to the position at sub
-
$11 levels. Including the dividends our overall return was close to 50%
,
for the
10% portfoli
o position
,
in the year and a half we have held it
and was a big performance contributor
in the third quarter.
We are certainly happy with the hoped for outcome, as discussed in the previous
partner letter, and the resulting impact to the partnership’s bot
tom line. We are slightly disappointed
in a lower than expected purchase price, however, given the unexercised go
-
shop provision this was
clearly the price the M&A market was willing to put on the company, and we will happily take our win
and profits.
We h
ave been slowly exiting the position over the last few weeks as
we have
been
redeploying the cash in new investments and adding to some of our existing portfolio positions a
t
lower prices
and should be fully out of it by the end of the 4
th
quarter.
•
Spartan Motors (SPAR)
–
On October 31
st
of last year Spart
a
n Motors reported disappointing results,
which showed the impact the current trade war
was
having on the global logistics system
and the
compan
y’s
operations. While
Spar
tan Moto
rs is
not
a
capital
intensive
business
model
, in order for a
manufacturing assembly
company
to be profitable and grow
,
it has to have continuous throughput
on its fixed cost labor and manufacturing base. When that throughput stops as a result of part
shortages, the operating leverage of the
fixed cost base is magnified
to the downside
as the company
still incurs a high level of expenses while not recognizing revenues
,
which is essentially what happened
with Spartan Motors last year. Our 10%
portfolio
position dropped 40% in one day on the new
s to mid
$6.00 dollar range. That was scary moment
, certainly a very unpleasant day
,
and was a big contributor
to our partnership’s underperformance last year.
One of the more interesting lessons
we have
learned throughout our career is that two
common
problems “value
companies
”
face are lost market share
/declining revenues
and operations issues.
While
operations are relatively easy to fix and are usually a temporary issue, market share
and lost
revenues
are
almost impossible to get back. While
we are sure there are many
other
examples, in
recent years we can only recall
our former portfolio holding
Hostess (TWNK) being able to get some
of its market share back post bankruptcy
,
due to its iconic brand name. Spartan Motors on the other
hand had a
relatively
short
-
term
operational
issue that we felt could be fixed in short order. As a result
we doubled down on our position at the fire sale prices being offered by the market
in November
2018
to make Spartan Motors
holding
a
full
10% positio
n
again
at the low price levels. A year later we
are happy to report that the stock has doubled
of its lows and was a big contributor to the
partnership’s performance this year and up 25% this past quarter on solid results.
Additionally, in September 2019
Spartan Motors
acquired Royal Truck Body, a very profitable Western
United States based competitor, for $90mm, financed with cheap bank loan debt.
We are
fairly excited
about the acquisition, for a number of reasons. On the financing side, the net t
ax benefit of $10mm
and the
favorable
financing, make the acquisition cheaper than appears at first blush. Additionally,
earlier in our career, we
had the opportunity to work on a number of “tuck
-
in acquisition” M&A deals
where the operational synergies
, from increased purchasing volume discounts to
cutting out
SG&A,
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were always a
more
significant contribution to the bottom line in the near term than originally
expected. This was especially true for smaller sized deals where the reported purc
hase multiple often
ended up being 20% to
3
0% lower than originally estimated. On the more important aspect of the
acquisition, with the purchase of Royal Body, Spartan Motors now has the ability to service national
operations
customers which it hereto lacked
. For example, in the past the company was only able to
receive 1/3 of commercial truck body orders from Frito Lay, however, with its new national footprint
it is much better positioned to compete for whole contracts
with
in
its existing customer base. This is
an important aspect as the “last mile delivery” industry contin
ues
to grow. Of note
,
in September
2019
,
Amazon, already a significant Spartan Motors customer, placed a 100,000 truck order from an
electric van st
art up
,
Rivian for delivery over the next 5 years. This is of course important
as
Spartan
is Original Equipment Manufacturer (OEM) platform agnostic, in that it is an assembler of various
classes of commercial truck bodies, not the manufacturer of
the truck. We believe that with the
industry dynamics and the new national footprint as a result of the acquisition, Spartan Motors is an
excellent place to capitalize on the trends and we have an expectation of significant national customer
order announc
ements in the near future.
Market Outlook and
Portfolio
Commentary
Life comes at you fast
. Within a matter of weeks, WeWork (or as they now like be called
,
The We
Company) went from an expectation of raising billions of dollars in an IPO at a
bove it
s
$67b valuation
,
to
continue to invest in
their
questionably mismatched duration and money losing commercial real estate
leases, to calling off their IPO, firing their hilariously over
-
the
-
top founder as the CEO, and shutting down
a number of questionabl
e business ventures to focus on
...
not going bankrupt
by Thanksgiving
.
One of
the more persistent trends over the last decade has been the significant outperformance of growth
labeled stocks over those that are considered value.
We are
not sold on the definitions needed for
inclusion in the value vs growth buckets, however it is hard to deny that
over the last decade growth has
significantly outperformed value
by almost 2.20% a year
or by over 56% in absolute terms
.
This was in
large par
t due to the
quantitative easing money fueled
loosening of the standards of what a “real
company” is by mostly private venture capitalists, but with significant spill over into the public markets.
As we can see by the charts on the next page, the numb
er of Russell 2000
components that are
unprofitable is approaching 40%, a number not too far from the top of the previous cycles. At the same
time, the small cap long
-
and short
-
term debt levels relative to total capital are at an all time high. Easy,
chea
p, and seemingly endless supply of money is a hell of a drug
and in the case of WeWork the ever so
reliable drug dealer of the last decade, the public markets, finally said no.
The massive post IPO
underperformance of other unsustainabl
e
money burning tech
darlings like Uber, Lyft, Smile Direct Club
and others is certainly leading to some soul searching among managers and investors in these giant piles
of burning garbage. In a
n another
“
this is your bubble sign
”
quote in New York Times this month, a
8
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P a g e
reputable vent
ure capitalist even went on record to say that
they have
begun to identify “gross margins”
(quotes in the article) for their portfolio companies, a practice hereto seemingly foreign to the industry.
Although unnecessary, we should point out that we
are very familiar with the
profit
ma
rgins of our
portfolio companies. While most of these anecdotes are very funny, they are also beginning to reflect a
simple reality that value investors are trained on and that
makes itself known at the top of most mark
et
cycles: companies
wh
ose business model requires contin
ued
access to capital markets to sustain
themselves are uninvestable.
While each cycle has its own idiosyncrasies and this cycle’s ocean of easy money is certainly
unprecedented, we continue to believe that
this cycle shares a lot of similarities with the 2000 Dot Com
tech bubble. For almost 10 years post an early 90s financial crisis, similar in causes though not in
magnitude to the 2009 one, the stock market continued its upward trajectory
,
fueled by unprofi
table and
unsustainable tech darlings. When the world finally woke up to reality that it
i
s likely to take a few more
decades for the internet companies to deliver on their business models, such as using the internet to
deliver groceries or pet food, unpro
fitable companies with little revenue but massive valuations, such
as
WebVan or Pets.com, collapsed in short order
,
starting in March of 2000. During that time, small cap value
companies significantly outperformed their growth labeled counterparts by almost
24% per year!
While the future is uncertain, and the current markets are awash with mixed signals on economic
performance, from a clearly evident global manufacturing slowdown but a
stronger and more confident
US consumer, we believe the market
dynamics are ripe for value oriented companies to begin to
outperform their grossly overvalued unprofitable growth peers.
Our portfolio is well positioned
for this
trend
from the long
perspective
as well as
with our
r
elatively small
sho
rt position in
Tesla.
9
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P a g e
Pa
rtnership Updates
We welcomed
two
new partner
s
to the partnership th
is quarter
,
bringing our total to
4
3
at
the end of
September
.
We will be in New York City and Washington DC in late October and early November
and will
be attending the University of Virginia Investment
Conference in Charlottesville and would welcome any
partners that would like to catch up in person.
Finally, as is annual tradition
,
we will be having our
partnership dinner in
early
February 20
20
in San Francisco.
This
year’s event was well a
ttended and very
fun and we look forward to seeing all of you again
next
year. We are excited about the continued growth
in partners and assets under management and as always are thankful for your business
.
Next Fund Opening
Ou
r n
ext
partnership openings will be
November
1
, 201
9
, and
December
1
, 201
9
. Please reach out for
updated offering documents and presentations at
info@artkocapital.com
or 415.531.269
9.
Appendix: Performance Statistics Table
Artko LP Gross
Artko LP Net
Russell 2000 Index
Russell MicroCap
Index
S&P 500 Index
YTD
41.2%
36.9%
14.2%
7.9%
20.0%
1 Year
1.2%
-0.2%
-8.9%
-16.0%
4.2%
3 Year
14.9%
11.2%
8.2%
5.3%
13.4%
Inception 7/1/2015
103.1%
71.7%
28.9%
28.9%
57.5%
Inception Annualized
18.1%
13.6%
6.2%
6.2%
11.3%
Monthly Average
1.5%
1.2%
0.6%
0.4%
1.0%
Monthly St Deviation
5.1%
4.6%
4.8%
5.1%
3.5%
Correlation w Net
-
1.00
0.78
0.74
0.71
10
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P a g e
Legal
Disclosure
The Partnership’s performance is based on operations during a period of general market growth and
extraordinary market volatility during part of the period, and is not necessarily indicative of results the
Partnership may achieve in the future.
In addition, the results are based on the periods as a whole, but
results for individual months or quarters within each period have been more favorable or less favorable
than the average, as the case may be. The foregoing data have been prepared by the Ge
neral Partner and
have not been compiled, reviewed or audited by an independent accountant and non
-
year end results
are subject to adjustment.
The results portrayed are for an investor since inception in the Partnership and the results reflect the
reinves
tment of dividends and other earnings and the deduction of costs, the management fees charged
to the Partnership and a pro forma reduction of the General Partner’s special profit allocation, if
applicable. The General Partner believes that the comparison o
f Partnership performance to any single
market index is inappropriate. The Partnership’s portfolio may contain options and other derivative
securities, fixed income investments, may include short sales of securities and margin trading and is not
as diversi
fied as the indices, shown. The Standard & Poor's 500 Index contains 500 industrial,
transportation, utility and financial companies and is generally representative of the large capitalization
US stock market. The Russell 2000 Index is comprised of the sma
llest 2000 companies in the Russell 3000
Index and is generally representative of the small capitalization U.S. stock market. The Russell Microcap
Index is comprised of the smallest 1,000 securities in the Russell 2000 Index plus the next 1,000 securities
(traded on national exchanges). The Russell Microcap is generally representative of the microcap segment
of the U.S. stock market. All of the indices are unmanaged, market weighted and reflect the reinvestment
of dividends. Due to the differences among the
Partnership’s portfolio and the performance of the equity
market indices shown above, however, the General Partner cautions potential investors that no such
index is directly comparable to the investment strategy of the Partnership.
While the General Par
tner believes that to date the Partnership has been managed with an investment
philosophy and methodology similar to that described in the Partnership’s Offering Circular and to that
which will be used to manage the Partnership in the future, future invest
ments will be made under
different economic conditions and in different securities. Further, the performance discussed herein does
not reflect the General Partner’s performance in all different economic cycles. It should not be assumed
that investors will
experience returns in the future, if any, comparable to those discussed above. The
information given above is historic and should not be taken as any indication of future performance. It
should not be assumed that recommendations made in the future will be
profitable, or will equal, the
performance of the securities discussed in this material. Upon request, the General Partner will provide
to you a list of all the recommendations made by it within the past year.
This document is not intended as and
does not constitute an offer to sell any securities to any person or
a solicitation of any person of any offer to purchase any securities. Such an offer or solicitation can only
be made by the confidential Offering Circular of the Partnership. This informa
tion omits most of the
information material to a decision whether to invest in the Partnership. No person should rely on any
information in this document, but should rely exclusively on the Offering Circular in considering whether
to invest in the Partners
hip.
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