Dear Partner,
In the third quarter of 2024, Woodbridge Capital Partners I, LP (the “Partnership”) returned 8.09% while the S&P 500 returned 5.89% (with dividends reinvested). Since its inception in April 2020, the Partnership has returned 176.74% compared to the S&P 500’s 132.47%.
The economy, the political sphere, and the stock market, despite their interrelation, are currently in vastly different states.
The US economy could be characterized as “pretty good.” As of the latest September CPI Report, core inflation stood at 3.3% over previous 12 months, the lowest since February 2021 when COVID stimulus-induced inflation began its initial ramp-up. The unemployment rate is similarly healthy at 4.1%, up from the lows of the past two-ish years but still historically low. In a prophylactic response to the signs of a slowing economy, the Fed recently cut the target range for rates by ½ a percentage point to 4.75-5%. The economy’s resilience so far has boosted hopes for a “soft-landing.” While the general expectation is for the Fed to continue rate cuts until reaching around 3%, inflation has some way to go to achieve the 2% target, so we will wait and see.
The stock market, on the other hand, could be characterized as “booming.” Over the last year, the S&P 500 is up ~40%. The current market is, by some measures, one of the most expensive ever. The Buffett Indicator (a ratio of total stock market value to GDP endorsed by Warren Buffett as a barometer for valuation levels) is at all-time highs. To be fair, it isn’t necessarily unreasonable for the market to trade at a historically elevated valuation, given the quality and growth potential of America’s largest companies today, but we see little room for additional multiple expansion. The key driver of the market for the last two years has been hype surrounding AI. If the market is to continue its run, it will have to be driven by earnings growth. We will see if said growth materializes.
As we mentioned in our previous letter, we’re excited by the possibilities of AI technology but have preferred to own companies with businesses proven to be profitable, some of which do stand to benefit from AI. It’s also important to keep in mind that stock market valuations are highly concentrated in a handful of mega-cap stocks (NVIDIA’s market cap, for example, is now higher than the total market cap of five of the G7 countries). As such, while the high valuation of the stock market does not bode well for future returns for stocks in aggregate, it hasn’t prevented unloved stocks, such as ours, from languishing in price and presenting exceptional opportunities.
Lastly, turning to the political sphere, the current geopolitical situation could be characterized as “troubling.” Russia’s war in Ukraine drags on, and the US continues to provide financial support to Ukraine. The war in the Middle East, where the US is also involved, has continued to escalate and expand, with tit-for-tat attacks between Israel and Iran. And China continues to eye Taiwan, with ever more bellicose rhetoric and brazen military exercises, increasing the risks of a direct conflict between the two countries. In the case of an all-out war, the US would aid Taiwan’s defense, but it’s not clear to what extent. I don’t claim to be anywhere near an expert on geopolitics but not much expertise is required to realize the precarity of the current state of affairs. Aside from the atrocities of wars both ongoing and latent, these developments represent real risks worth consideration when thinking about the possible trajectories of the economy.
We are currently in the midst of earnings season, with three out of our five companies having reported so far. Our telecom company set the date for the spin-off of its Swiss subsidiary for mid-November. With analysts’ price targets for the post-spin Swiss subsidiary at around $12, which we believe to be well above the value currently ascribed to it within the holding company, the spin-off represents a partial value-realization event that Jesse and I have long anticipated. Bar any significant price appreciation for the holding company, we intend to maintain our position in the holding company for a long time to come post-spin.
Our banking company announced another quarter of solid results in line with guidance and remains well-capitalized in excess of regulatory requirements. Our big tech company had a fantastic quarter, increasing revenues and operating income by 15% and 34%, respectively. Our other companies have not yet reported results from the most recent quarter. There were no other major developments or changes to the portfolio.
While the current political and economic landscape is complex, a disciplined focus on fundamentally strong, undervalued businesses has proven profitable regardless of broad market conditions by many investors. We remain confident that the Partnership will outperform a low-cost index fund over the long-term. We continue to be grateful for your trust and remain committed to your investment success.
Thank you,
Kyosuke Mitsuishi & Jesse Flowers