Sequoia Fund Q4 Letter: New Positions in a2Milk, Electronic Arts & Melrose

Ruane, Cunniff & Goldfarb is out with its Q4 letter for 2018.  Their Sequoia Fund finished the year -2.62% compared to -4.38% for the S&P 500.

New Positions in a2Milk, Electronic Arts & Melrose

During the quarter, the fund started 3 new positions.  Here's their thesis on a2Milk, a premium milk and baby formula producer in New Zealand:

"A good analogy here is Greek yogurt, which is believed in some quarters to confer health benefits you can’t get from regular yogurt. While Greek yogurt, like A2 milk, is a commodity product, companies like Fage and Chobani have built big businesses by wrapping compelling brands around it. a2Milk is attempting to do the same thing, to great effect thus far. Riding powerful consumer trends favoring products perceived to be healthy and natural, a2 has become the leading premium milk brand in Australia while making rapid inroads into the massive and quality-obsessed infant formula market in China. An effort to penetrate the U.S. milk market is also showing early promise."

Their new stake in Electronic Arts is a bet on gaming.  Games are taking more of people's time and are becoming more expensive to produce, favoring deep-pocketed companies like EA who have scale.  Sequoia feels the trends of digital game delivery and in-game purchases will benefit them.

Sequoia's bet on Melrose, on the other hand, is a bet on the jockey.  They write,

"Melrose is essentially a publicly-traded private equity firm, but with some very unusual twists. It mostly avoids borrowed money, focuses on only a small handful of investments at any given time and eschews dedicated funds that create a compulsion to invest without regard for the quality of the opportunities on offer. As with Berkshire and Constellation Software, the combination of a differentiated approach and a talented team has enabled Melrose to compile a hugely impressive long-term record of value creation. The company has never lost money on any of its realized investments, and in aggregate, it has produced an IRR of 24% per annum. At present, the company owns a collection of manufacturing businesses in the U.S. and Europe that span the aerospace, automotive and HVAC industries. In aggregate, they’re unlikely to grow any faster than the overall economy, but we think Melrose can make them substantially more profitable, and we ultimately expect management to sell them at attractive prices, freeing up time and capital for new opportunities."


Sold Almost All Of Their TJX Stake

During the fourth quarter they also sold almost all of their TJ Maxx (TJX) position.  This is notable as they first bought shares almost 20 years ago.  While the company is still operating well, they feel the future of the stock and business is less exciting as the PE ratio roughly double what they originally paid.

The letter also touches on 3 stocks that performed poorly for them last year that they still own: Mohawk (MHK), Naspers, and Charles Schwab (SCHW).

Embedded below is Sequoia Fund's Q4 letter:



You can download a .pdf copy here.

For more fund letters, be sure to check out excerpts from Baupost Group's Q4 letter as well as Oaktree Capital's Howard Marks latest letter.

Graham & Doddsville New Issue: Lee Cooperman, David Poppe, John Harris & More

The Winter 2018 issue of Columbia Business School's Graham & Doddsville newsletter is out.  It features interviews with Lee Cooperman of Omega Advisors as well as David Poppe and John Harris of Ruane, Cunniff & Goldfarb.  Also, they talk with Vulcan Value Partners' C.T. Fitzpatrick, as well as Seth Fischer of Oasis Management.

Cooperman talked about the market's run: "I believe we're adequately priced.  I think we're heading to a normalization.  We have been living through a very strange period."  He doesn't see euphoria in the market yet, though notes everyone expects the market to head higher.  He pointed to 1987 as an example where the market traded at 27x earnings.

The gentlemen from Ruane Cunniff talked about their investment in Alphabet (GOOG) which they recently bought more or and it's now around 10% of their fund.  They also touched on their thesis on Credit Acceptance Corp (CACC).  (We recently posted Sequoia Fund's Q4 letter here.)

The issue also includes student investment pitches including long Staples 8.5 2025 unsecured notes, long FleetCor Technologies (FLT), and long First Data (FDC).

Embedded below is the Winter 2018 issue of CBS's Graham & Doddsville newsletter:



You can download a .pdf copy here.