Thursday, April 20, 2017

April 2, 2017
Astana, Kazakhstan

Frist Quarter (Q1) 2017 Update Report

Dear Partner,

During Q1, the Green Valley Fund (“GVF”) appreciated by 17.94% on a gross return basis and 13.45% net of performance allocations to the General Partner. During the first quarter, the S&P 500 index (ETF: SPY) returned 5.46%.

Main characteristic of our portfolio, was that we swung only at long plays, the exact reason will be provided below. Our quarter was marked by an extremely strong performance by one name which is, claps please…Amazon Inc. (AMZN). The name has blessed us with 18%+ gain! At a current rate our portfolio is heavily skewed towards technology names, and especially to AMZN. However, without going into details we will lay out some plans that we are planning in regards to portfolio imbalance.

During the second half of the quarter, we have taken a number of positions in the energy sector, using the price decline of the underlying commodity: Oil. In short, we see higher prices come April and May.

For the quarter, the biggest winners were Amazon Inc. (AMZN), Boeing Inc. (BA) and Murphy USA Inc. (MUSA).  First two are our holding from the last year, while Murphy Oil is a new acquisition for our portfolio.

But, we had some losers too that we mistakenly misjudged our ability to correctly value or judge the worthiness of the business. Nike Inc. (NKE) is one of the names that we had high hopes but it seems that the fundamental changes taking place in the athletic apparel business is going to have a considerable effect on the performance of Nike’s top line growth. It might take a while and more consolidation before the investment merits might get noticed in the investing community. Meanwhile, we are keeping the position in the red, we are planning to take a final look closer to the end of April, and decide whether we will keep or just sell it out.

Initial position was established in July 2016, then we added more in September of 2016, and finally we bought more in February 2017 with a plan to see through the quarterly report, but it didn’t impress us at all. The main thing that we expected a buildup in the inventories they carried through the quarter, and it doesn’t show any sign of improvement. Though sales and EPS growth were in line or better, we judge the performance of the company by the amount of inventory that they carry to reach the sales targets. So it seems that Nike will have another year of rough performance.

Portfolio Related Events

Since the Election Day, the market have appreciated considerably due to the mostly optimistic approach to the new government’s pro-growth initiatives. In general, it is a normal practice to expect different approach to business and markets from the new administration. However, the statistics show that end of ‘16, and early ’17 run was among the largest and only time will show if plans will materialize to compensate for the run in the indexes.

In general, we are of the opinion that 2017 will be a great year for market participants, especially to those who are optimistic about future and mostly long. Here are the main proposals that are expected from the new administration to deliver:

1.     Tax cuts: Tax cuts are expected to fuel new investments both capital and into the markets
2.     Infrastructure investments: In general new investments are always considered to be accretive to the markets growth. There are many articles and discussions on the topic that you can find by googling.
3.     Military buildup: This is a tricky topic but favorable to the names like Lockheed Martin and our favorite in the group: Boeing Inc.

Portfolio Names
In 2017, market participants expect a number of rate rises. Further, rates rising from ultra-low to merely low would add a fiscal stimulus because the higher interest payments would add to deficit, we are of the opinion that rate rises combined with the benefit to savers will add to fuel to an accelerated economy.
In light of the above, here are our thoughts in regards to some of our current positions:
·        Long Amazon Inc. (AMZN): The name has been on and off in our portfolio many times before. The latest position was built in the range of December ’16 – January ’17. We started buying the name in the low 770s and into 810s in January. However since then we have stopped adding it, but I have to admit that, should we have continued adding it, we would have been in a better position than we are now. The main idea behind the name is that AMZN is a unique company that it is impossible to pinpoint in which industry it is competing at. It has one of the best CEOs that US Business history have ever seen. And having one the innovative thinking leaders help the company to grow manifold. One statistic would blow anyone’s mind. Here it is: Over the 10 year period AMZN has returned more than 2129.5%! However, we have to always stay focused and be on alert. Any business has ups and downs, which is inevitable. Therefore, we are planning to trim some of the AMZN in the coming month, before earnings report date. We are of the opinion that AMZN can grow manifold in the next 5 year period and we are ready to be patient.
·        Long Boeing Inc. (BA): Right after the Election Day, we have started accumulating the name on the dips. The first stake were bought at 150ish  level, and we added one more time on January 19th at around 158, just before it broke the critical 160 level. The main thesis behind the name was that it will benefit from the new administrations focus on military buildup. Boeing is one of the companies that has both geographic reach and economic scale to considerably expand its operations. But the mindshare that Boeing Inc. has in the minds of its customers is a different topic itself. For the last 30 years, the name has seen both ups and downs, but managed to come back stronger. We believe that on any dips we will be adding to our core holdings. However the price has to be no more than 160ish level.
·        Long Murphy USA Inc. (MUSA): The name has been on my radar since 2014. Murphy is engaged in the marketing of retail motor fuel products and merchandise through a chain of retail stores. The Company operates through the Marketing segment. The Marketing segment includes its retail marketing sites and product supply, and wholesale assets. As of December 31, 2016, its retail stores were located in 26 states, primarily in the Southwest, Southeast and Midwest the United States. Out of the total 1,401 stores, 1,152 were branded Murphy USA and 249 were Murphy Express locations, as of December 31, 2016. Murphy is one the companies that has a widest possible moat in terms of road side coverage for truck drivers, tourists which benefit greatly from the increased level of travel within the States.
·        Energy: We believe that overall deleveraging and increased amount of infrastructure projects in US, will substantially increase the demand for energy. In talking about commodities, we believe that longer term horizon outlook has more impact that just focusing onto the short term. It’s always difficult to pinpoint exact turns when the supply and demand balance will balance, but it will come. When the time arrives we will be ready with our names in our portfolio. The other reason is that valuation in the energy sector has been pressured for so long that we decided to buy some of the low valuation names that has a potential to grow in the coming years.
We have been fully invested for the last 2-3 months, but we are planning to take some gains while we have them and sell some of our positions in April. Main idea is that, at the next correction be it in energy sector or on overall markets, we will be ready to pull the trigger.
We are not married to our names, and we reserve the right to sell positions when we see fit.
As the statistics show the first months of each quarter, gives us better opportunities, this quarter was not an exception as we captured some nice prices in some names. So we are overall ready for the possible volatility during the April month. We have almost 15% of our assets in cash ready to be deployed.
On the last page, we have copy and pasted an excerpt from the 2016 Annual Shareholders Letter from Warren Buffett (Berkshire Hathaway) to his shareholders. The excerpt in our view perfectly captures the essence of making money in the markets. And that is (1) to stay in the game as long as possible, (2) to do sensible things and (3) be content with the gains that markets provide.
Usual Disclaimer (that will appear on all of our reports)
1.     Our Philosophy: However, we define investing as “acquiring and holding quality securities at suitable prices”. We are not trying to predict the short term movements but consider ourselves to be partners in companies that we are in, which basically means that we stay through thick and thin with the companies that we have selected to be a part owner of. These companies might have lagged in performance, but it has no bearing on their attractiveness in our eyes. The collection of companies that we own, are fine businesses that has yet to show its true value. As the Benjamin Graham once said, “The market can stay irrational longer than you can stay solvent”, we take our tasks seriously and do not have any margin at all. In addition to that, we keep certain amount of our capital in cash, to seize opportunities when they arise. Probably, you have already guessed that our collective view for the markets and many securities, at a current time is that they are being very overvalued and frothy. We believe that some sort of market correction seems imminent, though we are agnostic as per the date for that event. We have time, and we are waiting. Just be sure, that when the time comes, we will be ready to load our vaults.
2.     Performance: You should also understand that, I will be providing updates at quarter ends only, so that we all have certain yardsticks to measure performance. And, you should also understand that I can’t guarantee that results will always be positive, as I don’t know what prices will do the next day, next week or even year. But, what I do know is that businesses we have taken positions in and will take in the future, will become substantially more valuable in the next 2-3 years. Please do let me know your thoughts in regards to the current quarterly update letter.

Best regards.
GP - Talgat Akhmetov
Date: April 2, 2017

Appendix: An excerpt from the 2016 Annual Shareholders Letter

Q: How to make money by investing? What should people do? (The highlights is of ours)
A: “America’s economic achievements have led to staggering profits for stockholders. During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By yearend 2016, the index had advanced a further 72%, to 19,763.
American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.
Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”
During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.
As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase. Nonetheless, Berkshire’s collection of good businesses, along with the company’s impregnable financial strength and owner-oriented culture, should deliver decent results. We won’t be satisfied with less.”

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