I am pleased to report that Alluvial Fund enjoyed a very strong quarter, rising 15.1% and outpacing all relevant benchmarks. The fund has recovered all of its 2020 losses and is now in solidly positive territory. The fund remains solidly ahead of small-cap and micro-cap domestic and global benchmarks since inception. To say I did not expect this rapid recovery is putting it mildly. The outlook was downright bleak at the end of March. However, the pandemic has not slowed most of our portfolio companies down, and the market has rewarded them accordingly.
My job feels a lot more fun now than it did just a few months back. The first quarter of this year was not enjoyable in the slightest, but it was a good reminder that markets aren’t always in rally mode. Volatility is often the price of admission for those hoping to above-market long-term returns. I am happy we are enjoying a relatively good year, but well aware that a year means little in the greater context. Our portfolio is and has always been idiosyncratic to the extreme, looking nothing like any other fund or index I have encountered. This differentiation has contributed to our returns thus far and I believe it will continue to do so, but it comes at a cost. From time to time, our portfolio will be wildly out-of-favor and shunned by the market.
Small company stocks and especially so-called “value” stocks on the whole have experienced a years-long shunning, so any reversion to the mean could benefit Alluvial Fund. Thankfully, these headwinds have not kept the market from recognizing the value creation going on in such firms as P10 Holdings Inc, Intred S.p.A, Rand Worldwide, and many others, to the benefit of our portfolio’s returns.
P10 Holdings Inc: The Largest Contributor To Portfolio Gains
P10 Holdings Inc (OTCMKTS:PIOE) is by far the largest contributor to our portfolio’s gains this year. I have written about P10 before, so I won’t go into great detail here on the company’s strategy or operations. Suffice to say, the company continues to execute, adding another asset manager to its stable this quarter. In August, P10 Holdings Inc announced it would acquire TrueBridge Capital Partners, a venture capital manager. The deal closed in early October. With the addition of TrueBridge, P10 now offers a spectrum of alternative investment solutions, from traditional private equity to private credit and now, venture capital. The deal was creatively financed, preserving substantial upside for both P10 and the sellers. P10 now expects annual pre-tax, unlevered cash flow of $55 million or so. P10 Holdings Inc will convert an extraordinary percentage of this $55 million to free cash flow because the firm has a large tax shield and requires essentially zero capital expenditures.
Shares of P10 Holdings Inc have soared from a low of $1.25 amidst the COVID-19 panic to over $4.00 today. Despite the move, P10 shares still trade for only 12x my estimate of 2021 free cash flow. That’s incredibly reasonable for a firm of P10’s predictability and asset efficiency. Setting aside all growth from future acquisitions (and there will be more) it won’t take much for P10 Holdings Inc to grow its free cash flow per share at an 8-10% rate or more for years to come. Growing assets under management/committed capital at just 5% annually, plus benefiting modestly from operating leverage and debt amortization would accomplish the goal. In the nearterm, P10 Holdings Inc could experience a wave of new attention and a corresponding increase in valuation when the firm becomes an SEC reporting company and up-lists to a major exchange, likely within the next year.
P10 Holdings Inc was an ideal scenario for Alluvial Fund: a little-known company that had recently gone through a major corporate transition (bankruptcy and recapitalization) before completing a transformative acquisition. It took the market many months to discover P10’s new economics and strategy, which allowed us to build a sizable position at very attractive prices. As satisfying as our investment has been to this point, I think P10’s best days and returns are still ahead of us. Not every investment Alluvial Fund makes is one it will hold for years and years. Most companies are not worthy of that. But when I find a company like P10 Holdings Inc that has a high chance of multiplying shareholder wealth several times over, I won’t hesitate to make it a material portion of our portfolio.
Finding Opportunities In The World's Tiniest Public Companies
Alluvial Fund is heavily focused on finding opportunities in the world’s tiniest public companies. And I do mean tiny. While most of our investments are valued at <$100 million at the time of our initial investment, some of the fund’s recent purchases are shares of companies with market capitalizations of less than $1 million. Clearly, opportunities like these will not comprise a material portion of our portfolio, at least at cost. There are simply not enough shares to buy. But the opportunities are too good to pass up entirely. The bottom of the capitalization spectrum often offers incredible value.
That is not to say tiny companies make attractive investments as a rule. In fact, the opposite is true. The small-cap and micro-cap market segments offer a dizzying variety of companies to evaluate, but I am here to tell you the large majority are total garbage. I completely understand why so many investors avoid small companies entirely. Still, there is a lot of money to be made in identifying rare treasures amidst the detritus.
When evaluating a small-cap or micro-cap company for investment, investors can avoid a lot of potential heartache by answering a single question: why is this company so small? There are good reasons for a company to be small. It could be fairly new, or it could have started from a very small base of revenues and assets. Perhaps it was spun off from a larger entity, or it operates in a niche industry.
Then there are the bad reasons. Many companies are small because they are at best marginal operations. They really shouldn’t exist, and eventually they will not. Others are small because of continued malinvestment or strategic missteps by management, or because their industry is so challenged that profitable growth is all but impossible. I rarely find promising investments in this second, much larger group.
Companies that are small for good reasons often begin to grow larger over time, enriching shareholders in the process. They introduce new products and services, perform smart acquisitions, and adapt to changing business environments. Companies that are small for bad reasons tend to stay small. They muddle along, failing to earn their cost of capital year after year, they recommit to ineffective strategies and fall farther behind competitors, or they fight a hopeless war against dire industry trends.
This is not to say investors cannot make money in fundamentally flawed or challenged businesses. At a certain price, virtually anything can be cheap. However, I have found it much easier and less psychologically stressful to make money by committing capital to high-quality small companies with motivated, well-incentivized management, sound strategies, and growing end markets. The best part is getting this quality for free! Buying the highest perceived quality large companies almost always meaning paying a steep premium. Investors aren’t stupid. But the market routinely overlooks or ignores high quality tiny companies, which allows me to pay single digit multiples for cash flow streams growing at 15%, 20%, or more, backed by strong balance sheets and quality leadership.
Favorite Over-Achiever: EACO Corporation
Investors sometimes labor under the impression that in order for a business to generate excellent returns for shareholders, it must invent some revolutionary product or process or otherwise upend an existing industry or business model. Certainly, many of today’s tech darlings have done so. But there is another path, one that gets fewer headlines but the same outcome. This path is to pursue a conventional business model, offering a product or service that already exists, but do it better. I don’t mean to sound trite. It’s easy to say, very difficult to do. But over time, firms that figure out how to deliver a better customer experience, be it price, convenience, service, or any other factor that customers value, will tend to take market share from competitors and build customer goodwill.
The Alluvial Fund portfolio includes a few shining examples. One of my favorite little over-achievers is EACO Corporation. Via its subsidiary Bisco Industries, EACO is a distributor of fasteners and electrical components. Bisco distributes nearly 4 million different parts and components, operating from 49 locations in 33 states and 3 Canadian provinces. Bisco was founded by EACO CEO Glen Ceiley in 1973 and was the 20th largest US electronics distributor as of 2015.
Distributors perform a critical function, serving as middleman for components producers and end users and reducing search costs and inventory investment for each. Distributors earn low margins per dollar of revenue but turn over their assets multiple times yearly. A good distributor can earn a very healthy return on its equity capital, and EACO (again, through Bisco Industries) is a very, very good distributor.
From 2014 to 2019, EACO grew its revenues by 64%, its gross margin by 65%, and its operating income by 168%. The firm largely avoids debt and often has net balance sheet cash, but still routinely earns returns on equity of at least 20%. Despite its steady growth and strong balance sheet, EACO shares have nearly always been available for purchase at a single digit multiple of earnings. At $18, shares trade for 10x normalized fiscal 2019 earnings. The COVID-19 pandemic and the resulting industrial slowdown have caused EACO’s 2020 results to decline, but the firm is optimistic and reported stronger bookings and a sales backlog 16% higher than the previous year at May 31, 2020.
So why is a high-quality company like EACO with a history of profitable growth trading at 10x last year’s earnings? The biggest reason is the shockingly low number of shares available to investors. Of EACO’s 4,861,590 shares outstanding, Mr. Ceiley owns 4,704,864, leaving precisely 156,726 shares worth just $2.8 million for the public. That is scarcely enough to enable an informed two-sided market. I am happy to take advantage of this illiquidity discount and acquire shares whenever possible. EACO can easily double its revenues this decade and profits should grow at least as quickly. What’s more, EACO would make an excellent acquisition for any its competitors.
Growing Without Sacrificing The Ability To Invest
Thank you once again for investing in Alluvial Fund. I am pleased with what we have accomplishedand more excited than ever for what future years will bring. I continue to wake up excited each day to find more and better opportunities, wherever and whatever they may be. The wide world of obscure and over-looked securities always offers rewards to whomever is diligent enough to find them. The fund’s net assets are again in excess of $25 million, a level that leaves considerable room to grow without sacrificing the ability to invest in the most profitable niches. I do endeavor to grow Alluvial Fund, not only to more fully exploit the opportunities I see now, but also to gain access to new ones. As the fund grows, we gain access to new geographies and markets. Fresh hunting grounds!
Our address has changed! We didn’t go far. Just 10 miles down the Ohio River. Alluvial Fund, LP and Alluvial Capital Management, LLC now reside at:
816 Thorn Street
Sewickley, PA 15143
Our e-mail and phone information remain the same.
Many thanks to my wife, Kayleigh, for enabling me to maintain a nearly normal work schedule throughout the moving process. Thanks also to my associate, Tom Kapfer, for his help in editing this letter, creating charts and graphics, and generally making it far more presentable that I am capable of doing.
I am always available for questions and discussion. Please don’t hesitate to reach out. I hope that you and your families are well, and I look forward to reporting to you again after the close of the year.
It was Jan. 11, 2024 when software giant Microsoft (MSFT) briefly passed Apple (AAPL) as the most valuable company in the world.
Microsoft's stock closed 0.5% higher, giving it a market valuation of $2.859 trillion.
It rose as much as 2% during the session and the company was briefly worth $2.903 trillion. Apple closed 0.3% lower, giving the company a market capitalization of $2.886 trillion.
"It was inevitable that Microsoft would overtake Apple since Microsoft is growing faster and has more to benefit from the generative AI revolution," D.A. Davidson analyst Gil Luria said at the time, according to Reuters.
The two tech titans have jostled for top spot over the years and Microsoft was ahead at last check, with a market cap of $3.085 trillion, compared with Apple's value of $2.684 trillion.
Analysts noted that Apple had been dealing with weakening demand, including for the iPhone, the company’s main source of revenue.
Demand in China, a major market, has slumped as the country's economy makes a slow recovery from the pandemic and competition from Huawei.
Sales in China of Apple's iPhone fell by 24% in the first six weeks of 2024 compared with a year earlier, according to research firm Counterpoint, as the company contended with stiff competition from a resurgent Huawei "while getting squeezed in the middle on aggressive pricing from the likes of OPPO, vivo and Xiaomi," said senior Analyst Mengmeng Zhang.
“Although the iPhone 15 is a great device, it has no significant upgrades from the previous version, so consumers feel fine holding on to the older-generation iPhones for now," he said.
A man scrolling through Netflix on an Apple iPad Pro. Photo by Phil Barker/Future Publishing via Getty Images.
Counterpoint said that the first six weeks of 2023 saw abnormally high numbers with significant unit sales being deferred from December 2022 due to production issues.
Apple is planning to open its eighth store in Shanghai – and its 47th across China – on March 21.
The company also plans to expand its research centre in Shanghai to support all of its product lines and open a new lab in southern tech hub Shenzhen later this year, according to the South China Morning Post.
Meanwhile, over in Europe, Apple announced changes to comply with the European Union's Digital Markets Act (DMA), which went into effect last week, Reuters reported on March 12.
Beginning this spring, software developers operating in Europe will be able to distribute apps to EU customers directly from their own websites instead of through the App Store.
"To reflect the DMA’s changes, users in the EU can install apps from alternative app marketplaces in iOS 17.4 and later," Apple said on its website, referring to the software platform that runs iPhones and iPads.
"Users will be able to download an alternative marketplace app from the marketplace developer’s website," the company said.
Apple has also said it will appeal a $2 billion EU antitrust fine for thwarting competition from Spotify (SPOT) and other music streaming rivals via restrictions on the App Store.
The company's shares have suffered amid all this upheaval, but some analysts still see good things in Apple's future.
Bank of America Securities confirmed its positive stance on Apple, maintaining a buy rating with a steady price target of $225, according to Investing.com.
The firm's analysis highlighted Apple's pricing strategy evolution since the introduction of the first iPhone in 2007, with initial prices set at $499 for the 4GB model and $599 for the 8GB model.
BofA said that Apple has consistently launched new iPhone models, including the Pro/Pro Max versions, to target the premium market.
Analyst says Apple selloff 'overdone'
Concurrently, prices for previous models are typically reduced by about $100 with each new release.
This strategy, coupled with installment plans from Apple and carriers, has contributed to the iPhone's installed base reaching a record 1.2 billion in 2023, the firm said.
Apple has effectively shifted its sales mix toward higher-value units despite experiencing slower unit sales, BofA said.
This trend is expected to persist and could help mitigate potential unit sales weaknesses, particularly in China.
BofA also noted Apple's dominance in the high-end market, maintaining a market share of over 90% in the $1,000 and above price band for the past three years.
The firm also cited the anticipation of a multi-year iPhone cycle propelled by next-generation AI technology, robust services growth, and the potential for margin expansion.
On Monday, Evercore ISI analysts said they believed that the sell-off in the iPhone maker’s shares may be “overdone.”
The firm said that investors' growing preference for AI-focused stocks like Nvidia (NVDA) has led to a reallocation of funds away from Apple.
In addition, Evercore said concerns over weakening demand in China, where Apple may be losing market share in the smartphone segment, have affected investor sentiment.
And then ongoing regulatory issues continue to have an impact on investor confidence in the world's second-biggest company.
“We think the sell-off is rather overdone, while we suspect there is strong valuation support at current levels to down 10%, there are three distinct drivers that could unlock upside on the stock from here – a) Cap allocation, b) AI inferencing, and c) Risk-off/defensive shift," the firm said in a research note.
Major typhoid fever surveillance study in sub-Saharan Africa indicates need for the introduction of typhoid conjugate vaccines in endemic countries
There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high…
There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.
Credit: IVI
There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.
The findings from this 4-year study, the Severe Typhoid in Africa (SETA) program, offers new typhoid fever burden estimates from six countries: Burkina Faso, Democratic Republic of the Congo (DRC), Ethiopia, Ghana, Madagascar, and Nigeria, with four countries recording more than 100 cases for every 100,000 person-years of observation, which is considered a high burden. The highest incidence of typhoid was found in DRC with 315 cases per 100,000 people while children between 2-14 years of age were shown to be at highest risk across all 25 study sites.
There are an estimated 12.5 to 16.3 million cases of typhoid every year with 140,000 deaths. However, with generic symptoms such as fever, fatigue, and abdominal pain, and the need for blood culture sampling to make a definitive diagnosis, it is difficult for governments to capture the true burden of typhoid in their countries.
“Our goal through SETA was to address these gaps in typhoid disease burden data,” said lead author Dr. Florian Marks, Deputy Director General of the International Vaccine Institute (IVI). “Our estimates indicate that introduction of TCV in endemic settings would go to lengths in protecting communities, especially school-aged children, against this potentially deadly—but preventable—disease.”
In addition to disease incidence, this study also showed that the emergence of antimicrobial resistance (AMR) in Salmonella Typhi, the bacteria that causes typhoid fever, has led to more reliance beyond the traditional first line of antibiotic treatment. If left untreated, severe cases of the disease can lead to intestinal perforation and even death. This suggests that prevention through vaccination may play a critical role in not only protecting against typhoid fever but reducing the spread of drug-resistant strains of the bacteria.
There are two TCVs prequalified by the World Health Organization (WHO) and available through Gavi, the Vaccine Alliance. In February 2024, IVI and SK bioscience announced that a third TCV, SKYTyphoid™, also achieved WHO PQ, paving the way for public procurement and increasing the global supply.
Alongside the SETA disease burden study, IVI has been working with colleagues in three African countries to show the real-world impact of TCV vaccination. These studies include a cluster-randomized trial in Agogo, Ghana and two effectiveness studies following mass vaccination in Kisantu, DRC and Imerintsiatosika, Madagascar.
Dr. Birkneh Tilahun Tadesse, Associate Director General at IVI and Head of the Real-World Evidence Department, explains, “Through these vaccine effectiveness studies, we aim to show the full public health value of TCV in settings that are directly impacted by a high burden of typhoid fever.” He adds, “Our final objective of course is to eliminate typhoid or to at least reduce the burden to low incidence levels, and that’s what we are attempting in Fiji with an island-wide vaccination campaign.”
As more countries in typhoid endemic countries, namely in sub-Saharan Africa and South Asia, consider TCV in national immunization programs, these data will help inform evidence-based policy decisions around typhoid prevention and control.
###
About the International Vaccine Institute (IVI)
The International Vaccine Institute (IVI) is a non-profit international organization established in 1997 at the initiative of the United Nations Development Programme with a mission to discover, develop, and deliver safe, effective, and affordable vaccines for global health.
IVI’s current portfolio includes vaccines at all stages of pre-clinical and clinical development for infectious diseases that disproportionately affect low- and middle-income countries, such as cholera, typhoid, chikungunya, shigella, salmonella, schistosomiasis, hepatitis E, HPV, COVID-19, and more. IVI developed the world’s first low-cost oral cholera vaccine, pre-qualified by the World Health Organization (WHO) and developed a new-generation typhoid conjugate vaccine that is recently pre-qualified by WHO.
IVI is headquartered in Seoul, Republic of Korea with a Europe Regional Office in Sweden, a Country Office in Austria, and Collaborating Centers in Ghana, Ethiopia, and Madagascar. 39 countries and the WHO are members of IVI, and the governments of the Republic of Korea, Sweden, India, Finland, and Thailand provide state funding. For more information, please visit https://www.ivi.int.
Incidence of typhoid fever in Burkina Faso, Democratic Republic of the Congo, Ethiopia, Ghana, Madagascar, and Nigeria (the Severe Typhoid in Africa programme): a population-based study
We’ve added 60% to national debt since 2018. Germany - a country with major economic woes - added ‘just’ 32%.
Maybe it will never matter. Maybe MMT is real. Maybe we just cancel or inflate it out. Maybe career real estate borrowers or career politicians aren’t the answer.
I have no idea. Only time will tell. But it’s going to be fascinating to watch it play out.
He is right: it will be fascinating, and the latest budget deficit data simply confirmed that the day of reckoning will come very soon, certainly sooner than the two years that One River's Eric Peters predicted this weekend for the coming "US debt sustainability crisis."
According to the US Treasury, in February, the US collected $271 billion in various tax receipts, and spent $567 billion, more than double what it collected.
The two charts below show the divergence in US tax receipts which have flatlined (on a trailing 6M basis) since the covid pandemic in 2020 (with occasional stimmy-driven surges)...
... and spending which is about 50% higher compared to where it was in 2020.
The end result is that in February, the budget deficit rose to $296.3 billion, up 12.9% from a year prior, and the second highest February deficit on record.
And the punchline: on a cumulative basis, the budget deficit in fiscal 2024 which began on October 1, 2023 is now $828 billion, the second largest cumulative deficit through February on record, surpassed only by the peak covid year of 2021.
But wait there's more: because in a world where the US is spending more than twice what it is collecting, the endgame is clear: debt collapse, and while it won't be tomorrow, or the week after, it is coming... and it's also why the US is now selling $1 trillion in debt every 100 days just to keep operating (and absorbing all those millions of illegal immigrants who will keep voting democrat to preserve the socialist system of the US, so beloved by the Soros clan).
... having already surpassed total US defense spending and soon to surpass total health spending and, finally all social security spending, the largest spending category of all, which means that US debt will now rise exponentially higher until the inevitable moment when the US dollar loses its reserve status and it all comes crashing down.
We conclude with another observation by CNBC's Brian Sullivan, who quotes an email by a DC strategist...
.. which lays out the proposed Biden budget as follows:
The budget deficit will growth another $16 TRILLION over next 10 years. Thats *with* the proposed massive tax hikes.
Without them the deficit will grow $19 trillion.
That's why you will hear the "deficit is being reduced by $3 trillion" over the decade.
No family budget or business could exist with this kind of math.
Of course, in the long run, neither can the US... and since neither party will ever cut the spending which everyone by now is so addicted to, the best anyone can do is start planning for the endgame.
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