This Is An Incredible Time To Invest in Stocks. Wait, what?
Mindset Value Fund First Quarter 2021 Results
Disclaimer: The below post is my 2021 First Quarter Letter that I sent to investors in the Mindset Value Fund. This post is NOT a solicitation. I talk about stocks that I own and my view of the future. It is imperative that you do your own due diligence and not rely on anything written below. I’m posting this in order to show how my writing translates to actual performance. With that, I hope you enjoy and gain insights.
I’m pleased to report that the Mindset Value Fund was up 17.7% net of fees for the first quarter of 2021.
Opportunities Abound
I think this is an incredible time to invest in stocks. Wait, what?
I can hear the questions already. How could I say that when the market is at all-time highs? Don’t I understand that the market is expensive and that there are signs of speculative excess everywhere? What kind of values could possibly be found in a market like this?
The key is in understanding that the global stock market is not uniformly at all time highs, nor are all stocks at excessive valuations. The difference in valuations between the top 200-300 U.S. companies and everything else is pretty remarkable. Due to the rise in passive investing, an obsessive focus by investors in the largest companies and a media coverage dominated by the clickbait nature of the latest price moves of GameStop or Tesla, a lot has been ignored.
While all of the attention is elsewhere, there are some pretty phenomenal companies with great management that sell for very attractive valuations. Actually, I’m overwhelmed by the opportunity, especially companies that trade on international exchanges.
Consider that right now, 69% of the Mindset Value Fund is invested in international stocks. (Actually, this is kind of misleading, as 34% of that number are American based cannabis companies that are not allowed to publicly trade in the US, so they trade in Canada, but we will get to that in minute.)
One of the most extreme examples is Consorcio Ara (Mexico: ARA), one of the leading home builders in Mexico that trades at a remarkable 40% of book value, is unlevered, profitable and is sitting on an immense land bank ahead of what is surely a massive Mexican bull market in housing. (Consorcio Ara Deep Dive Research Report)
Mexico is very much a value investor’s paradise right now and I would be remiss to not mention that the Mexican stock exchange, Bolsa Mexicana (Mexico: BOLSAA), itself is public and trades at an 8% trailing free cash flow yield, is growing at double digits, has no debt, pays a 5% dividend and also has a buyback ongoing for 5% of its shares.
In France, we own one of the most resilient and best businesses I have ever invested in. La Francaise des Jeux (France: FDJ) is the French national lottery and sports gambling monopoly. Remarkably, COVID is making the company structurally more profitable as more people are now playing the lottery online, which has more than double the margins as retail.
Before COVID, online participation was 5%. By Q3 of last year, online play rose to 9%, then to 10% in Q4. Remarkably, the percentage surged again in Q1 of 2021, to 12%. If online participation can settle in at a rate comparable to other national lotteries such as in the UK or Australia of 25-30%, FDJ is going materially higher. This company converts a remarkable 80%+ of EBITDA into free cash, is unlevered and is committed to paying out 80% of income in dividends. We recently bought more.
HireQuest and Opportunities in Small Caps
Small caps are another fertile area of focus. And an excellent example is HireQuest (NASDAQ: HQI). In Q1, HireQuest announced two ridiculously good acquisitions that improve the company’s earnings power to $1.30 per share or more. The company possesses what I believe to be a superior franchise model for the staffing industry with over 50% operating margins. It has a long runway for organic growth and acquisition opportunities and is led by one of the best CEOs I’ve ever invested in. Despite its recent run, HireQuest is still very much undervalued. I know of no successful franchise company that sells for less than 25 times earnings. Add in a possible addition to the Russell 2000 and I’m still quite bullish. (I posted an interview with the CEO, Rick Hermanns.)
Blazing Forward with Cannabis
I continue to be amazed at the opportunity in investing in US cannabis companies. I love the fact that 99% or more of US investment capital is not involved in the space, but have been puzzling as to why the opportunity exists.
Our big new investment in the cannabis space is the combination of the Mercer Park Brand and Glass House Group (Canada: BRND, OTC: MRCQF). Size, scale and management matters and Glass House has all three (The most valuable greenhouse in America).
I also interviewed Glass House Group’s President Graham Farrar.
There are so many opportunities in cannabis, it makes my head spin. But it helps sticking to the guiding investment philosophy for the fund.
The Mindset Value Way: Low Downside, Uncertain Upside
The Fund’s investment strategy is to research and invest in undervalued, misunderstood, or unfollowed publicly traded securities that offer limited downside over the long term, but also have an uncertain upside. The portfolio will consist of investments that offer a “heads I win, tails I don’t lose” strategic approach to investing. To use baseball as an analogy, we are focusing on hitting singles and doubles, but just might have a shot at hitting a homerun, but whatever we do, we don’t want to strikeout.
Summary
While I have no idea how our stocks or the stock market in general is going to act in the short run, I’m very excited about the long-term prospects of our portfolio. As always, if you have any questions or comments, feel free to reach out to me anytime.
Sincerely,
Aaron M. Edelheit