Third Quarter Portfolio Review

Another three months is in the books and there was some wild volatility that went along with it. The S&P 500 ended the quarter with a total return of 1.2%, something that for most was seen as a win with all of the potential calls of recession. For the 2k Hedge Fund portfolio though, the returns were actually quite the opposite.

The 2k Portfolio returned a -1.3% during the third quarter, but most of this was not due to the stocks that were selected. I have spoken on many different occasions about the current struggle for me, as a value investor, to find positions that I felt safe in and held value. I finally put my money where my mouth was and moved into 100% cash during the third quarter. Due to this move to cash, almost the entirety of the negative move was caused by the tax that I had to pay on realized gains. While paying the tax isn’t ideal, a one percent move South is welcome over a larger move when the market inevitably dips into correction mode.

I am happy to say that since moving out of all of my postions, only one of them increased steadily, AT&T (T). Many of my other positions such as Ford (F), Fiat Chrysler (FCAU), and even the bonds have been somewhat stagnant. While I don’t like to look at the “what ifs” while investing, it is reassuring to know that the money in my account gaining interest wasn’t wasted.

There were a couple of additions to the portfolio that I want to speak on rather quickly. These additions, which only make up ~8% of my portfolio, are Turtle Beach Corporation (HEAR) and VAALCO Energy Inc. (EGY). I won’t go very deep in this post about these two but there are a couple of shallow points that I want to make about each and the opportunity they present.

NEW POSITIONS

Turtle Beach Corporation (HEAR)

HEAR is a company that is becoming more and more familiar in the E-Sports arena. They make headphones and recently have branched out into some peripherals with their purchase of ROCCAT. The lack of debt, combined with what I would judge as advantageous moves by management, have set the company up in a great place. Do I think they will continue the surge of sales that Fortnight produced for them last year? In short, no, but they are sitting with a very nice looking opportunity at being a top brand in a sector which is set for steady growth. This is reason enough for me to take a small position at a price that I think is advantageous.

VAALCO Energy Inc. (EGY)

A small energy company in West Africa that trades for under $2.00 does not sound like something that I would buy right? Well here we are and I have taken up a small position. This is another company that I believe has potential to be a solid investment over time. They currently hold zero debt and are repurchasing shares. The real key is management’s ability to do two things, increase barrel production and decrease barrel cost. Currently the operational and free cash flow break even prices are $37 and $47 dollars respectively (excludes cap ex). These margins are dangerously thin with the current crude price in the low 50s, but management is what I believe in. Since Cary Bounds’ takeover in 2016 the process has been very straightforward and consistent in decreasing debt and increasing cash flow, and have laid out a vision that I am confident in. For me this is a risky investment but one that could pay off huge and worth a small portion of my portfolio.

CASH

The majority of my portfolio ~92% is currently sitting in cash as I wait on opportunities to present themselves. As of now I am still investing money in the fund, but am placing it into savings and gaining 1.8% interest on the money. While this is small, and I know of other positions that I could be raking in more money in dividend payments, it is in my opinion the best place currently for my money to stay. I will continue to be patient as I wait for a correction, and when it happens, I will be ready to go into a 100% equity position.

This is a great time to be an investor as long as you are smart and sometimes the smartest thing to do is nothing at all. I am still researching companies each week, trying to find the diamonds in the rough, but as for now there is not much that has warranted my interest. As always, you can see my portfolio in real time here.

If you have any questions or want to talk shop, please reach out to me in the comment section or shoot me an email at 2khedgefund@gmail.com. Until next time, Happy Investing!