This post is about my “Fun Fund.” I am going to discuss the performance of this actively managed investment account in the third quarter of 2021 and share some thoughts on a few positions.
As a reminder, most of the prior posts about this account (which is really just a small Roth IRA that I am tracking more closely than my other investments) are located on this page.
The second quarter of 2021 wrapped up over a month ago. Based on my visitor statistics, a fair number of you were checking the site for updates (or more likely bots were looking to spam my comments). I apologize for not posting anything. I have been absolutely buried at work. I keep getting volunteered to give talks and additional duties like committee work and delivering training. The whole COVID period has been oddly very busy for me. As discussed below, I also “recently acquired a new hobby.”
In addition, I think going to a quarterly schedule of these “update” posts (I also journal my personal finances/savings) has gotten me out of the habit of putting together posts. I think I will go back to monthly update posts for the personal finance/journal next year.
Q3 2021
In Q3, this account was DOWN (3.45%). Year to date the account was up 19.44% as of 09/30/31. For most of the quarter, I was carrying over 20% in cash. During the quarter, however, I purchased some new positions and ended the quarter with about 10% in cash. Of course these new positions, apparently unaware that I now own them, promptly continued to decline. Sometimes I wonder if everything in markets is just momentum and anti-momentum (I probably read that in Mandelbrot or something).
This performance was worse than the SPY, and QVAL, which were up .02% and down (1.08%), respectively. RPV was down (2%). QQQ was up 1.07%. The Gotham Enhanced 500 ETF (GSPY) was down (.43%).
GSPY ETF
A little aside on the GSPY ETF: I’m going to try and remember to keep it in my set of funds for comparison. GSPY is an ETF tracking an index managed by Joel Greenblatt’s Gotham Asset Management. I’m a huge Greenblatt fan.
You can go check out the materials on their site, but my interpretation is that GSPY is an implementation of his “value weighting” strategy. They basically re-weight the SPY to tilt into names they conclude are cheapest relative to their fair value (and away from the richly valued names). They have a mutual fund that has been running this strategy and doing well even in this sort of strong momentum/animal spirits environment.
He wrote a book about this strategy called The Big Secret for the Small Investor. Greenblatt always jokes that no one read this book, but I think it is a really good read for individual investors. He talks about fundamental indexes for much of the book, but there are a lot of nuggets. For example, he suggests some portfolio management limits to prevent market timing, while managing the psychological desire to “do something ” (basically, allow yourself to change your allocation by 10% or 20% but no going to cash).
“Attribution”
What’s that? You want to know how I was able to assemble a portfolio that sucked so badly last quarter? Well, you’re likely to regret asking that, because here’s a chart with all my holdings and their performance last quarter:
These are listed from largest (WFC @ ~ 14%) to smallest position (USB ~4%) as of 11/04/21. I used BIL as a proxy for my cash. I would normally keep the cash in T-bills, if they yielded anything. I wouldn’t mind adding some more USB and CMCSA on weakness. Those are both sub 5% positions right now and I would be good with running them up to 10% at cost. Pretty sure I said no more banks in the Q2 post, but what the heck, MOAR BANX.
Let’s talk about some of the dogs. The worst performer is a new position, Dream Finders Homes Inc. (DFH). This is a small home builder that came public via IPO within the past year. I only caught about half of that -28%. My cost basis is ~$18. I’ve got under a 5% position.
Dream finders
Basically, DFH is an entry level builder that purports to be emulating the $NVR business playbook of running an “asset light” builder. That means they generally don’t purchase land/lots to hold for development, instead taking options on land for future subdivisions/lots. This pushes that risk onto other balance sheets, but also leaves some upside on the table for those folks and they could be stuck a lot of worthless options in a big housing decline (but not tons of cratering, illiquid, land inventory). They also don’t really build speculative/inventory homes (i.e., homes that don’t have a contract with an ultimate buyer in place whilst building). DFH is hq’d in Jacksonville FL and has good exposure to sunbelt markets. It has been very acquisitive over the past couple of years, which is a risk. NVR developed the asset light strategy after blowing up following acquisition of Ryan homes after all. If you’re interested, there are many good NVR discussions on ValueInvestorsClub.com.
Despite all the asset light strategery, it will probably just be a housing-sector-beta bet. I think I saw a chart on Twitter showing that Lennar, DR Horton, Toll and the other builders have done about as well as (or better than) NVR since the GFC. If DFH keeps growing around projections, however, it is cheap. NVR is pretty much just as attractively valued to be honest, but DFH has a ~$1.5B market cap versus like $18B for NVR. There’s a lot more room to grow.
Miracle-Gro mah Portfolio?
Well, I was planning to do a full post on Scotts Miracle-Gro (SMG), but that seems unlikely, so I will dump some of my fertilizer (sorry about that) here. During the quarter I added a ~8% position in SMG.
Scotts Miracle-Gro sells Scotts and also Miracle-Gro. They also sell weed-b-gon and distribute a bunch of round-up products for Syngenta…basically they manufacture and distribute (and also sell direct) a ton of lawn and garden products. The core business is (like) a CPG business and has historically put up nice margins and returns on capital.
The CEO Hagedorn is son of the founder of Miracle-Gro. They merged it with Scotts in the 90’s. This is basically a family controlled company as they own about 35% of the stock. Hagedorn is a former fighter pilot (no shit) and seems to pull few punches on the calls I’ve listened to. From 2016 – 2019, they sold their Scotts lawn service to TruGreen (largest home lawn service) and then sold the TruGreen equity stake to the controlling private equity shop. The past several years, via their Hawthorne division, they have been expanding bigly into hydroponics and supplying lighting and equipment for the cannabis growing industry. Recently they launched basically a venture arm for marijuana ventures.
I don’t want to act like I get super detailed in making purchase decisions for this account. I am basically implementing a quick-ish three pronged analysis for new purchases. I’m going to call this my “Trident of of Destiny,”as an homage to professional investor cheesy metaphors.
Wielding The Trident of Destiny
So the first “prong” [stop me if you’ve heard this before] is whether the business is “good.” By this, I basically mean that the returns and margins are likely to be good in the future. I don’t really love trying to divine reinvestment opportunity so much. Hence, I strongly prefer to rely on historical data and just see if I think the future is likely to be reasonably similar to the past.
With SMG, the historical margins and returns have been nice. It’s a branded CPG-ish company. I think it has a decent shot to maintain that with enough investment and decent management. The product category does have like “craft brands,” but the stuff is expensive to develop, brand, and or ship and SMG has scale advantages that help with this (and strong AF distribution network).
I also think this business evidences a bit stronger barriers to entry than I thought on first blush. You might think, “Meh, it’s branded seeds and fertilizer that is basically chemically identical to competitors and is a total commodity.” However, they research and develop chemical compounds and plant cultivars (and obtain patents) in a fashion that is somewhat similar to pharmaceuticals.
For example, Scotts “pro vista” Kentucky Blue Grass or St. Augustine supposedly has better color, grows slower (less mowing), and is resistant to glyphosate (you can just nuke almost any weeds without killing the lawn). It’s a hot item right now and you probably can’t buy it if you want to. They have developed a bunch of these cultivars and they can license them to sod farms or seed sellers and the like and their scale and marketing muscle comes in handy. Brands, loyalty, and performance guarantees are also important as the cost of the seed and chemicals is a pretty small portion of the “cost” of most lawn and garden projects (you just want your plant or grass to have the best chance to live or look great after all the labor and watering, etc…).
To me, the big concern about the business quality is their diversification into the weed business as basically a commercial supplier. The revenue growth is there but if the cannabis growers consolidate into a few national mega farms the SMG market power and ability to brand seems likely to be worse than the CPG “Scott’s guarantee” DIY business.
I guess that might turn on whether cannabis is legalized at a federal level, allowing more scale for the growers and distributors. If it remains kind of regionalized with lots of “mom and pop” participants (from what I can tell). I guess that’s better for SMG/suppliers. That’s the status quo, so that seems reasonably likely. They are also running a venture fund/operation so it gives you a potential little juice/exposure to US cannabis growth.
Regimes like VA where people now can grow legally for their own consumption (is my understanding, be sure to do your own research) are probably great for them, as you likely get more hobbyist, hydroponic gardeners. Oh yeah, housing growth/household formation seems great for them as well.
Turning to the second prong on the Trident of Destiny, I like to look at agency costs/alignment of interest between the shareholders and someone who is in the board room (or can get there relatively easily). In the case of SMG, a key fact that I weigh as a positive both for business quality and historical alignment/low agency costs is the fact that SMG is a “dividend growth stock.”
I know dividends can be fool’s gold, but a history of upping payouts means 1) cash has been available (probably generated by a beast mode bidness), and 2) the company has a history of throwing shareholders some of this cash (and there is pressure to continue to do so).
In this case, there is also a CEO/family in control of the company and they own a ton o’ stock. Of course, sometimes insiders in control can really screw over minority shareholders, much worse than hired suits who throw out nonstop canned phrases on conference calls, but in this case, the stock holdings dwarf the compensation package and accoutrements.
Hagedorn does sometimes wear SMG “commercial aviation crew” shirts, which is a bit troubling (about that spend/overhead/perks) and there are some weird related-party transactions for aircraft leasing back and forth, but I mean Buffett has “the indefensible.”
As noted, in addition to the huge stonk holdings, we have the dividend growth history thing as evidence they probably won’t hose us/freeze the minority out, and now they are also buying back stock. Hagedorn was bitching about the stock price on the 2Q call and basically laid out a $300MM buyback (which was formally announced with the 3Q call). I like lumpy buybacks (shows they care and are also not just mindlessly buying back stock because everyone else is). I also like that Hagedorn sold the commercial lawn spraying business, first taking a minority position and then taking cash money, maybe showing an anti-empire-building bent, any maybe high grading to the consumer CPG business (and the weed…they love the weed).
The final prong in the trident is that the stock is “cheap.” The stock trades at like 15x next years consensus. I think it’s priced well. SMG has sold off due to turrible comps/stalling growth in the CPG business, and maybe some deflation of the mary j bubble.
SMG really benefited from a boom in home gardening and lawn care stuff while everyone was stuck at home last year. I’m seeing a negative reaction to the removal of this huge tailwind (I think) in several covid beneficiaries. If you’re an analyst or wall street pro who might be fired if the company doesn’t continue to grow for a year or two (and they are coming off huge explosive growth that is likely to be flat or down a bit for a year or two), you gotta’ consider a sell/downgrade.
I think the stock is also getting hit on inflation fears (their margins are definitely taking a hit for now). They will probably get squeezed for a while, maybe a year or two, but I think they will be able to increase prices and do fine (well over the long term). They really have pretty strong brand loyalty and do stand behind their products versus like the big box “generic” options. If I’m wrong about that, it could be a bad bet.
It could also fail to work out if they have “diworsified” in the name of revenue growth by expanding in the commercial cannabis supplier business (Hawthorne), but I think the core business is strong and you millennials need to get some of that good miracle gro moisture control potting soil so you don’t kill all your plants. I also don’t hate the cannabis exposure/optionality.
Finally, “researching” this name kind of got me into my lawn, so that’s another reason I haven’t written a blog post. There are like whole reddits and forums and discords and youtube channels and tons and tons of people who are really into lawn care as a hobby (and now I’m one of them, wtf!). Not to mention a huge industry of commercial lawn care and turf management business people (who are also brand loyal…sometimes to different brands).
To wrap up SMG: I think it’s a pretty good bidness; there are indicia that agency costs are likely to be ok (better than average chance I don’t get fkd by insiders), and the stock is “cheap-ish” (for reasons I think I can understand/live with…that’s not a prong…it’s a trident…so there are only three). Thus, I like the stock.
FIN
In conclusion, I am really into lawn care now and I am turning this blog into nothing but pictures of my lawn at different times of the day. Just kidding, but for real, don’t tempt me by not reading my finance stuff.
I got smoked by the SPY last quarter and the value funds I track as benchmarks also wrecked me. I finally deployed some of my cash into two new (losing) positions, so it’s fine.
I should have some more cash available at some point soon as COTY my largest position (as of publication), is ripping, and I decided a while ago to sell it once it returned to an acceptable valuation. I bought it back before I started trying to track this account and implement some rules by which I manage it. I will probably just try and track the momentum on it a bit and look to sell when it seems to be dissipating (nothing fancy, probably something pedestrian like watching the 50/100 day moving averages).
Anyways, thanks for reading! [And pls don’t steal my Trident of Destiny metaphor. I might launch a fund or an RIA, after I blow up a few times.] Stay tuned for some riveting middle-class personal finance journaling content (and/or grass pics)!