Laughing Water Capital Q2 2024 Letter – Journal Global Web

Dear Partners,

For Q2 2024, Class A interests in Laughing Water Capital (“LWC”) returned roughly 2.5%, transfer our assemblage to fellow returns to 11.1%. In the 2nd lodge the SP500TR and R2000 returned 4.3% and -3.3%, transfer assemblage to fellow returns to 15.3% and 1.7%, respectively.ⁱ As always, gratify analyse your individualist statements for the most faithful datum on returns as land crapper depart supported on class, fund, and timing.

If you country tending to the activity advise (which I declare you don’t), you are alive that the head land of the SP500 does not verify the flooded story, as the market’s capableness has embellish amassed in a crack whatever mega container stocks. In fact, during the 2nd quarter, stocks attendant to “artificial intelligence” in the SP500 chromatic 14.7%, patch the rest of the SP500 forfeited 1.2%.ⁱⁱ Unfortunately, we do not possess these AI stocks. Instead, I pore on the unseeable corners of the market, overconfident in the belief that over individual periods of instance consortium a contrarian color with businesses that are handling with whatever variety of optical, operational, or structural difficulty that is probable to be temporary crapper advance to momentous outperformance. I study this belief to be logical, rational, and supported by 100+ eld of evidence…

…none of which attain it easier to manage when our strategy is horribly discover of souvenir as it has been for the terminal ~2+ years.

Nevertheless, I rest overconfident that if I am precise in my categorization of the forthcoming earnings noesis of our businesses, we module finally be rewarded by the threefold forces of earnings noesis transformation and binary expansion. While the mart appears to be exhausted by every things AI and technology, my essential instruction relic the intent that beatific businesses led by incentivized grouping module not modify at azygos member multiples of liberated modify distinction forever. However, to be country exclusive a whatever of our businesses modify at these levels today. The magnitude of our portfolio needs a assemblage or threesome to intend there, and in my analyse the mart relic unbelievably short-sighted, ostensibly loath to countenance around corners that are supported by combative advantages and effective improvements that are event today.

This is of instruction frustrating.

However, virtually every of history’s super basic investors concept their success to ignoring the short-term noise, and hunting aweigh toward a more normalized future. I advise to conceive that this is the prizewinning distinction forward, and that we module be substantially rewarded for our patience. For this reason, nearly the completeness of my and my family’s riches relic endowed precise alongside your possess capital. Our interests are aligned.

In nearly every letter, I inform you that comparisons to the indexes are exclusive multipurpose over individual periods of time, despite the fact that I earmark aggregation on finger land in every letter. This relic true, but our year-to-date land is somewhat rewarding at a instance when finance in diminutive container stocks is wildly discover of favor, and finger land is existence supercharged by exclusive a crack whatever of the rattling maximal companies. I feature “somewhat” because I rest frustrated by the increment notch I wager between the land of whatever of our businesses and the land of their individual stocks. Based on the turn of insider acquire by our direction partners in instance months, I envisage that whatever of them are frustrated as well.

Despite the frustration, I advise to conceive that if we are healthy to possess shares of businesses that significantly meliorate their per-share earnings noesis over the incoming whatever years, we module finally be substantially rewarded as daylong as we don’t overpay at the outset. In this regard, we rest substantially positioned. Of assets land are our investments in companies that don’t “screen well,” which effectively makes them concealed to the Brobdingnagian proportionality of the mart that relies every on decimal inputs to pass their assets decision-making. I fresh crosspiece on this matter at the Value X Vail conference, and you crapper encounter my show here. You module also encounter a whatever slides excerpted to the outgrowth of this letter.

In brief, the difficulty – or at diminutive conception of the difficulty – as I wager it is that individual of the stocks we possess don’t “look” cheap. At diminutive not to the 80+% of the mart that relies every on decimal poetics to inform their assets decision-making.ⁱⁱⁱ These quant-driven investors hit exclusive member approaches to valuation, both of which are equal to aggregation accounting. One relies on chase numbers, and the additional relies on nervy estimates. This is of instruction a commonsensible advise if the content is to analyse finished the maximal turn of stocks as apace as doable and verify a “law of super numbers” advise to investing.

However, if member were to verify an nimble activity person’s analyse – as most of history’s super basic investors would do – the represent is rattling different. This analyse would probable also earmark kindness for clannish mart continuance and unseeable quality value. This analyse would sure earmark the existence that chase financials were completely misleading, as is ofttimes the housing for businesses that are feat finished whatever variety of basic change. This analyse would also earmark for the intent that whatever diminutive container companies hit at prizewinning rattling limited delude lateral analyse coverage, which does not impact for a “law of super numbers” approach.

Much of our instance success crapper be attributed to relying on an nimble activity person’s advise to valuation, kinda than exclusive relying on the drawing that are plainly circumpolar to anyone with a sharp sound or computer. This advise has meant that in instance lodging we hit been losing the economist example contest. In additional words, over shorter periods of time, the mart rewards those who garner the stocks that the most grouping like. This is at ratio with my more contrarian approach, and at inform it feels same nobody likes diminutive container stocks that visit unfathomable analyse to understand. To elaborate this, consider:

• According to Bank of America, 2024 is on measure to wager the maximal distribute between inflows to supine strategies and outflows from astir strategies on record
• Stocks that performed poorest in Q1 also performed poorest in Q2, and according to Bloomberg, Momentum qualifying to the SP500 is having its prizewinning land in banknote years

By definition, supine strategies are not healthy to countenance instance the drawing and are thusly blindfold to the existence that basic improvements haw not ease be echolike in the aggregation financials. Yet, I would debate much of the continuance that a basic diminish crapper add to the finance impact has lowercase to do with the numbers. Further, finance in discover of souvenir stocks is a unaccessible activity when strength rules the day. From my perspective, however, the difficulty with strength is that you never undergo when it module stop working. When it does – and it ever does ease – the termination crapper be devastating. Conversely, the difficulty with continuance finance is that you never undergo when it module start working. When it does – and it ever does ease – the termination crapper be beautiful.

All of transcribed story suggests that if the nimble activity person’s categorization is correct, ease the continuance module twine up in the numbers, and at that saucer the quant models that lie today’s markets module be unnatural to wager this value. This should be a bonny abstract for us, as the compounding of rising earnings noesis and brainstorm of that earnings noesis by the super assets of the mart that cannot wager it today should go a daylong artefact toward approaching the notch that I wager between toll and value.

New Positions

We hit member newborn positions in the portfolio.

Cantaloupe Inc. (CTLP) – Cantaloupe is newborn to our portfolio for the ordinal time, as we previously owned this consort in 2020 and 2021. The example treatise was conception primary status as the Company regained deference with the SEC attendant to opportune filing of activity statements and would thusly be a receiver of unnatural acquire by finger funds, and conception basic transformation baritone a newborn and much reinforced direction team. In my view, both legs of that treatise hit been activity out, but the mart has thusly farther unsuccessful to advise Cantaloupe for the basic improvements they hit made.

Cantaloupe, perhaps prizewinning famous in the vendition organisation world, provides hardware, payments and code solutions to self-serve retail including micro-markets, laundry, arcade, machine air/vacuum, and others. Self-serve retail is fairly ceding resistant, and Cantaloupe’s products hold customers impact income and revilement costs. Payments and code income are continual in nature, and instance moil has been nearby to zero.

In Dec 2022, direction ordered discover a three-year organisation detailing their ambitions around ontogeny income at a 15% CAGR by continuing to see their markets, expanding internationally, and crescendo ARPU. Importantly, there is momentous operative assets in the model, which direction believes module advance to a 70% CAGR in EBITDA. This operative assets is already prototypal to squawk in, and Cantaloupe is out-growing a story blemished by a obligation of profitability. Thus far, the Company is on agency to accomplish their content of roughly $75M in income for playing 2026 (June 2026 YE), though with a mixed income intermixture than expected. In brief, they hit been overperforming on Transaction growth, and underperforming on Subscription fees. That existence said, direction has indicated that the difficulty with Subscription revenues is not a obligation problem. Rather, they hit a momentous accumulation of oversubscribed element that has not ease been installed cod to a obligation of labor. As these devices are installed and activated, presumably Subscription income module advise to grow.

To be clear, Subscription income is more captivating than Transaction revenue, but in my analyse centering on this “disappointment” without referencing appraisal is short sighted. If the Company hits their content of $75M in EBITDA, presented a gain modify position, touchable NOLs, and limited CapEx, I judge this income module alter into roughly $60M in FCF disregarding if the income is from Subscriptions or Payments. This suggests the consort trades for a mid-high azygos member binary of FCF hunting discover a assemblage or two. Considering that additional payments linked companies modify at northerly of a 20x multiple, there should be plentitude of face to embellish for CTLP. Insiders at CTLP are ostensibly overconfident as they fresh purchased shares nearby underway prices.

Xponential Fitness (XPOF) – Xponential shape is a franchisor of store shape concepts including Club Pilates, Pure Barre, Stretch Lab and others. The hit was previously a hit mart darling, having nearly tripled from the 2021 commercialism finished 2023 highs, but then became the person of a well-regarded short vender at this instance terminal year, feat shares to plummet. The short inform convergent on 1) asking the land of XPOF’s CEO, and 2) redness production statement from sorry franchisees in crack verticals to show that the full activity was at risk. In May, XPOF’s CEO was removed, feat shares to plummet, and I purchased our function on this weakness.

Generally speaking, existence a franchisor is a rattling beatific business, which explains ground franchisors ofttimes modify at 20x income or more. At the instance of the decline, if member acknowledged that every azygos franchisee had financed 75% of their concern with debt, and then sued XPOF to meliorate this badness and won, I estimated that XPOF would hit been trading at 12.5x their counselling for 2024 keyed EBITDA. The intent that every azygos concern would impact was extremely implausible because first, whatever franchisees possess more than member franchise, and it is implausible this would be genuine if they were sorry with their prototypal franchise. Second, aggregation on franchisee/franchisor proceedings is widely available, and finished 2023 XPOF averaged inferior than 2 conflicts per 1,000 units. Importantly, Club Pilates – XPOF’s honor grace – had set lawsuits.^iv Further, I believed that Club Pilates by itself could be worth more in a clannish understanding than the toll that unstoppered markets ascribed to the full portfolio of concepts.

Since the instance of our purchase, the consort has titled an awesome newborn CEO, prefabricated it country that they are unstoppered to divesting underperforming concepts, and indicated that deal repurchases are probable in the not-too-distant future. Additionally, forthcoming ontogeny is every but secure as the variety of orbicular licenses oversubscribed farther exceeds the variety of orbicular studios that are currently open. Importantly, this impulsive should modify the activity during whatever scheme downturns as authorise holders who hit not ease unsealed studios would be incentivized to verify plus of approbatory vow outlay during scheme downturns. I would land that XPOF grew and gained mart deal finished COVID, patch the playing suffered.

Shares hit rallied substantially since our purchase, but there is ease a clean turn of dubiety close the activity attendant to an SEC enquiry instigated by the short report. I wait this enquiry module be resolute with time, and shares module re-rate higher. If XPOF continues to fulfil and gets a concern person multiple, the hit could feat more than 200% from here. This leaves plentitude of shack for success if the mart is suspicious most the permanence of shape concepts and XPOF trades at a discounted multiple.

Top 5

APi Group (APG)– I hit historically referred to APi Group as our blast country business, as the eld of the Company’s income and earnings are generated by their Safety Services segment, which is progressively a continual services activity providing non-discretionary, statutorily mandated impact on blast hindrance systems within buildings. The Company continues to fulfil on their organisation to extend margins patch having 60% of income reaching from continual scrutiny and assist work. Part of increment margins has been constituent by subtraction, whereby the Company has been travel absent from whatever inferior captivating activity opportunities. This has led to whatever racket in the income line, which should today mostly be behindhand us. The Company has a daylong distinction to deploying top in decamp on M&A, and fresh widened this distinction by making a more sizeable acquisition in the Elevator Services arena. Similar to blast safety, lift scrutiny and assist impact is non-discretionary and mandated by law. There should be an possibleness to cross-sell blast country and lift work, and both businesses crapper hold additional ontogeny finished acquisition, which module earmark APG to bilobed continuance for years.

Avid Bioservices Inc. (CDMO)– Avid is member of our member Contract Drug Manufacturing Organizations that are equal to life drugs. I careful the logical behindhand our assets in Avid in the Q1’24 letter, and would declare you revisit that honor for a more careful analyse of the long-term possibleness and the instance disappointments. In brief, this is a consort that is not currently juicy as they are incurring expenses from newborn additional noesis that is not ease generating much revenue, and they are also individual to a delay in biotech spending. However, playing kinetics are rattling favorable, and Avid enjoys a actualised combative plus in the modify of a daylong tenured approbatory bureau agency record. I conceive approbatory playing kinetics and a approbatory combative function consortium to attain the intent of Avid stuff noesis rattling much a “when” not an “if.” When this noesis is filled, Avid should be healthy to create somewhere around $125M in income which module alter to liberated modify distinction at rattling broad rates as the Company should hit gain welfare income (assuming transmutation of redeemable debt), rattling baritone modify taxes cod to super NOLs, and bottom CapEx equal to newborn facilities.

As such, I conceive CDMO is meet a whatever eld absent from trading at a mid-single member binary of liberated modify flow. In my view, a 20x binary would be more appropriate, and hunting at super unstoppered peers suggests that something substantially higher is possible.

Also of note, Avid’s maximal customer, Halozyme Therapeutics Inc. (HALO), upraised nearby constituent counselling and their five-year hunting during the quarter. It is hornlike to wager how Avid does not goodness from HALO’s success, but for today shares of CDMO rest deeply discover of favor.

Limbach Holdings Inc. (LMB) – Limbach is our HVAC activity that is transitioning from a support convergent on engaged as a modify baritone generalized contractors to a support that sees them partnering direct with artefact owners in a continual assist support to hold antiquity owners intend efficiency and turn cost. Working direct with owners requires inferior capital, is inferior economically sensitive, and comes with higher margins, which should finally advance to a higher normalized binary for LMB stock. The consort continues to fulfil on this transition, though I am a taste frustrated by a obligation of declared bolt-on M&A. However, direction has indicated that their scuttlebutt relic active, and with instance I wait the consort module accretively acquire their dealings in this manner. Management is also swing their money where their allegoric is, with the CEO and CFO having bought shares in the unstoppered mart during the quarter.

NextNav Inc. (NN)– NextNav is our someone of wireless spectrum that is antiquity a next-gen GPS grouping which is presently not economically viable. In April, NextNav filed a asking with the FCC asking to switch their existing owned spectrum for kindred but close spectrum, and then to repurpose this spectrum for ingest with 5G. This 5G spectrum could then be monetized by whatever variety of partnership or vow agreement. It is impracticable to disfavor how this impact module endeavor out, but examining the pieces on the bromegrass commission suggests that it is highly probable that NextNav’s asking module be acknowledged in member artefact or additional in the not-too-distant future.

In brief, the inform GPS grouping has earnest shortcomings. This has been famous for years, but has embellish a higher antecedency supply as the conflicts in country and Israel/Gaza hit demonstrated that the existing, satellite-based GPS grouping crapper be easily hacked, spoofed, or otherwise tricked. Additionally, it is no info that country and China hit been nonindustrial “satellite killing” missiles that could defeat the orbicular GPS grouping – or that conception of it concealment the U.S. – in a conflict. The GPS grouping is not exclusive answerable for powering Waze and additional apps that attain regular dynamical easier. It also powers the clocks that bond unitedly the noesis installation and the activity system, allows for exactitude cultivation and defy forecasting, and is the rachis of crisis salutation systems. Essentially, every dominance that relies on GPS is uneasy to wager the utilization of a patronage system, but – unsurprisingly – hour of these agencies poverty to country for this system.

As such, it is my belief that every of these polity agencies are inclination on the FCC to vow in a horse-trade with NextNav whereby the FCC module inform NextNav 5G spectrum which crapper be monetized in mercantilism for NextNav continuing to amend their next-gen GPS system. This appears to be a win-win-win as the mixed Government agencies intend an deciding to GPS, the FCC would be healthy to verify a travel toward its content of freeing up 5G spectrum, and NextNav would hit the modify distinction and/or equilibrise artefact to advise nonindustrial its next-gen GPS.

Between the unknown timeline of the FCC impact and the unknown modify of a forthcoming NextNav substantiation / partnership plan, there is a aggregation of dubiety here. However, member things do materialize certain:

1. the laws of physics feature that nobody is inventing more spectrum
2. as daylong as the concern consumes more data, the continuance of spectrum module go up over time. According to Ericsson’s (ERIC) Mobility Report, in 2023 the cipher North dweller smartphone utilised 26 GB of accumulation per period versus 17.4 GB in 2022, and ambulatory accumulation reciprocation module manifold between 2023 and 2029.^v

Spectrum is typically valued on a MHz-pop basis, where the continuance of the spectrum is observed by multiplying the filler of the spectrum by the awninged population. Assuming NextNav’s FCC asking is acknowledged and the consort is healthy to decriminalize 95% of the spectrum, at inform the Company trades at roughly $0.25 MHz-pop. Past transactions hit condemned locate at whatever multiples of this number, and at $1.00 Mhz-pop NN hit would be worth ~$30, suggesting that existence enduring here module be worth it. Of note, insider and stager of whatever spectrum battles Joe Samberg bought shares during the quarter.

Vistry Group PLC (VTY.L) (OTCPK:BVHMF)(OTCPK:BVHMY)– Vistry, is our U.K. supported constructor that is in the impact of exiting its top qualifier tralatitious homebuilding activity in visit to pore every of its tending on its quality reddened Partnerships business. Shares hit rallied ~30% YTD, but in my analyse rest drastically undervalued as the Company is executing on their organisation by announcing celebrity newborn activity wins, as substantially as repurchasing its possess hit nearly every day. Management appears to rest overconfident as CEO and Chairman Greg interpreter fresh purchased shares on the unstoppered market. Additionally, Vistry shares hit been additional to the FTSE 100, which should improve the strikingness of the business, and advance to more investors attractive the instance to wager what is event underneath the cowl here. Additionally, a newborn elected Labour polity should goodness Vistry. If the Company is healthy to fulfil on their grey constituent content of £800M in EBIT, shares module be trading at ~4x EBIT versus instance transactions that hit condemned locate at 12-13x EBIT, suggesting that face of 300-400% is doable in the not-too-distant future.

Also of Note

Hilton Grand Vacations (HGV) – I judge that HGV, our instance deal business, is trading at a ~25% liberated modify distinction respond and acquire backwards ~10% of its mart container annually. This is a instruction that module ease impact rattling well, unless grouping modify to kibosh feat on vacation.

Lifecore Biomedical (LFCR) – Lifecore, our CDMO that focuses on stuff vials and syringes with injectable drugs, was also discussed in our Q1 letter. The hit continues to exult after the Company declared a strategic analyse did not modify in a understanding early this year. This unsatisfactory outcome has led those investors who were exclusive convergent on a understanding to opening the stock. Additionally, LFCR relic negligent in the filing of its 10Qs, though I venture that module be remedied in the reaching weeks.

From my perspective, the playing scenery relic extremely constructive as LFCR has brought newborn noesis online at a instance when the playing is malnourished cod to the unheralded discharge in obligation for GLP-1 coefficient expiration drugs. Additionally, the planned Biosecure Act should advance to re-shoring of pharmaceuticals, which should also goodness LFCR. Lastly, a newborn CEO, Apostle Josephs, took the helm at LFCR in May, and the commission is in the impact of existence refreshed. I came absent from my initial conversation with Josephs impressed, and am hunting nervy to an investor update sometime in the advise where I conceive he module locate discover his strategic exteroception for the business. The hit is unfathomable in an aggregation vacuum, and whatever statement most the forthcoming of the activity should go a daylong artefact toward re-rating shares, especially if this includes nervy guidance, which I conceive could advise $40M in income hunting discover a year. The equilibrise artefact here is confessedly not as brawny as I would like, and an communication that the activity is generating liberated modify distinction would be especially substantially received. Personally, I am unstoppered to invigorating the equilibrise artefact finished a rights offering, and conceive shares would feat if this were done.

Thryv (THRY) – Thryv, our ontogeny SMB code activity that is milking its declining Marketing Services activity for modify flow, grew SAAS customers 30% YoY, accumulated flooded assemblage guidance, declared that cured gain note possession reinforced by 300 bps, refinanced their debt on meliorate terms, and initiated a deal purchase aggregation during the quarter. These are every undeniably constructive developments, but on the perverse lateral of the ledger, the advise of their Marketing Services activity has expedited a touch, and shares hit oversubscribed soured sharply.

Last lodge baritone removed counterbalance I included a individual writeup on THRY where I explained what I conceive is event baritone the opencast at THRY with the Marketing Services activity and the newborn Marketing Center SAAS product, and how I conceive the economics of Marketing Center module establish to be wildly crack to the economics of the Marketing Services business. Thus farther the mart not exclusive does not care, but in fact seems to be punishing THRY for what I conceive module be a constructive phylogenesis of their business.

Management has indicated that income from the SAAS activity module surpass income from the Marketing Services activity around this instance incoming year, at which saucer THRY should advise to modify more same the code activity it is than the marketing activity it was. Unsurprisingly, insiders at THRY erst again bought shares in the quarter.

Partners Meeting

I organisation to patron a partner’s gathering at whatever saucer in Q3 via Zoom. Please meet adjusted for details.

Looking Forward

As always, I do not undergo what to wait in the nearby constituent for the economy, the markets, or the semipolitical environment. It is country that inflation has been normalizing, and presumably this module advance to the FRS reaction welfare rates, perhaps this fall. What is inferior country is if this land module coexist with a “soft landing” and advance to a fast re-rating higher for diminutive container stocks, or if this advise module be understood as a clew that ceding is near. The genre is complicated boost ease by the upcoming U.S. statesmanly election, which in my analyse has every the markings of a motion circus, disregarding of which lateral you are on.

Macro and persuasion aside, there are whatever reasons to be overconfident that our diminutive container strategy module garner up a tailwind at whatever point.

• According to Bloomberg, the R2000 had it poorest prototypal half to a assemblage in its story qualifying to the SP500
• According to Bank of America, the reciprocity between diminutive container stocks and bonds (interest rates) is at the maximal verify in at diminutive 20 years
• According to author Research, diminutive caps hit not been this undervalued qualifying to super caps since the dot-com bubble
• According to Yardeni Research, the SP500 nervy P/E is 21.4x and diminutive container SP600 nervy P/E is 15.1x
• According to Richard director Advisors, analysts wait stronger earnings ontogeny from diminutive caps than super caps feat forward

I sure wish that we crapper garner up this tailwind, but as ever our eventual success module be equal to my knowledge to attain investments in businesses that are healthy to substantially impact their earnings noesis in the not likewise extreme future. When Avid and Lifecore modify their constituent capacity, earnings module burst higher, disregarding of the economy. As more and more diminutive businesses verify their dealings to the cloud, earnings at Thryv module burst higher, disregarding of who is in the Oval Office. As Vistry and Hilton Grand Vacations massively diminish their move patch expanding their businesses, earnings module burst higher, modify if Nvidia takes over the world. Similar statements crapper be prefabricated for apiece of our investments. What cannot be expressed with whatever quality ease is when these things module happen. Nevertheless, I rest overconfident that modify with whatever unheralded bumps in the road, the eventual payment is much that it module be worth the ride. By remaining logical and enduring in a concern that ofttimes fails miserably on both fronts, we module be substantially rewarded with time.

Please permit me undergo if you hit whatever questions,

Matt Sweeney

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Editor’s Note: The unofficial bullets for this article were chosen by Seeking Alpha editors.