To Our HIT Capital Partners,
I hope this update finds you enjoying the summer. The past 6 months have been a boon for HIT Capital’s future. Externally, we have seen a moderate increase in inflation and a decrease in stock market valuations.. Internally we finished building our investment software and transitioned the majority of our portfolio over to high quality momentum and value stocks.
The opportunities are the best I’ve seen in my investing lifetime. I’ll share more of the highlights below, but first I’ll start with an update on HIT Capital’s recent under performance.
Performance & Allocations
HIT Capital declined -29.9% in the first half of 2022 and was below the global benchmarks: International -19.2%, S&P 500 -20.6% and the hedge fund index -10.5%. This brings HIT Capital’s compounded annual growth rate to 7.4% and total return since inception to 97.5%.
General Market View
The pains of account values decreasing and less purchasing power are also the foundation of a healthier and brighter investing future.
Here are two reasons why:
Inflation is causing interest rate increases and that, in turn, leads to more expensive loans. This strengthens HIT Capital
because we rank cash flowing companies higher and indebted companies lower.
The second reason our future is brighter today than in January is because the cost of ownership has declined. The CAPE, (Cyclically Adjusted Price to Earnings Ratio) which is my favorite market pricing metric is down from 39 to 29, a drop of 24%. The cost of ownership decreased by 24%. This equates to an added 2% per yr in long term real returns. I’ll share more on HIT Capital’s new software and additive cost of ownership decrease below.
I’m happy to share that we finished developing the front end of the investment analysis software. You no longer need to be a coding nerd like myself to access, analyze, and interpret our financial data. The new charts above were copied from the investment software along with a couple snapshots at the end of this update.
With the latest version of HIT Capital’s software completed we are beginning to explore the added value of layering on non automated research and learnings to the top ranked companies.
For example ZIM, the shipping company I mentioned in the last update was our first investment derived from the software. ZIM went public in 2021 and has a current P/E below 1, meaning they are worth more than what they made in earnings last year. I dug into the stock further and found its largest pre-IPO owners have been selling their shares post lockup regardless of the company’s performance. Over the past year ZIM has been growing assets, giving cash back to its shareholders, and integrating new technology to a seemingly archaic shipping industry.
Another company we are invested in, Finwise, appears to be a small, cheap, and local retail bank. But when we look at their finances and investors’ reports we see a rapidly expanding financial tech company. Their newer management team (2010) has built a track record of developing new strategies, building new software, and executing upon them. Finwise has been growing at a clip of 50% a year since 2016, and has grown its net income 100% year over year since 2020. Finwise, like Zim, recently went public in 2021. We particularly like that it is less known, cheap (P/E of 3.88), and has an impressive track record. The fastest growing component of their business is providing loan origination and servicing services to peer to peer lending platforms, some of which we researched for HIT Fixed Income.
As we dig further I will share more of our learnings and findings.
HIT Capital’s 30% decline has been painful over the past 6 months but the opportunities arising from our software and broad market devaluation are the best I’ve seen in my investing lifetime. Our Value + Growth strategy is 6x cheaper than the average US publicly traded company, 5x cheaper than Vanguard’s Value Index Fund, and 3x cheaper than HIT Capital in 2018.
On the back of this opportunity I have added $25,767 to the fund over the past 6 months and will add more in July. If you would like to do the same or discuss HIT Capital’s latest under performance and or current market conditions give me a call, shoot me a note, or grab a spot on my calendar.
Until next time, have a safe, prosperous, and joy filled 2022!
*4 of the 5 value metrics include operating cash flow, free cash flow, EBITDA, earnings, and or enterprise value
*If you don’t care for the investing lingo, give me a call and we can chat in normal English. I will look at creating more natural and less academic names for our strategies in the future.
HIT Capital investment software snapshots:
Diving deeper into Baytex Energy