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Boyles Fund 4Q16 Letter To Partners – Things that Don’t Make Sense

Here’s the year-end update from Boyles Asset Management, the firm we featured in our October 2016 publication.

Unfortunately, for compliance and regulatory reasons, Boyles have asked us not to publish the firm’s returns for 2016.

Here’s the rest of the Boyles letter (excluding returns) in full.


Quick Portfolio Updates

Creston

Creston, a smaller holding, was bought out by its largest shareholder in November. While we were cautious of this shareholder’s intentions, we had been comforted by the presence of unrelated large shareholders, whom we believed would counter such an offer. That comfort proved to be without merit. The 27% premium to the three-month average share price was much too low in our opinion—representing a valuation of approximately 10x free cash flow (which we believed to be below the firm’s earnings power). We voted against the offer. The total internal rate of return (IRR) since the inception of the idea in 2012 (prior to the Boyles launch) was 7.9%; without the impact of currency, the IRR was 14.4%. The modest outcome was impacted by the severe decline in the British Pound; the modest early outcome of an acquisition the company made; mediocre management which, while changed, was unable to generate organic growth; and as mentioned, the modest exit multiple.

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Stanphyl Capital: January Update

Below is Stanphyl Capital’s January update in full. The firm has got off to a rocky start to the year but is still beating its benchmarks by a wide degree since inception.

Stanphyl Capital: January Update

Friends and Fellow Investors: For January and year to date 2017 the fund was down approximately 3.9% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 1.9% while the Russell 2000 was up approximately 0.4%. Since inception on June 1, 2011 the fund is up approximately 119.2% net while the S&P 500 is up approximately 91.2% and the Russell 2000 is up approximately 73.9%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two. Although this month we had some great news (and returns) from a couple of our microcap long positions (LTRX and MGCD), the fund’s negative performance was heavily influenced by its short position in Tesla Motors, which was up considerably despite an onslaught of negative fundamental developments. Here are the portfolio specifics… We continue to hold a large short position in the Russell 2000 (via the IWM ETF; short basis: $135.29; January close: $135.23). I think this is a good hedge for our microcap long positions in what I perceive to be a dangerous (expensive and increasingly protectionist) market, and as the companies in the index collectively have no earnings a potential Trump corporate tax cut can’t help them, while valuation (EV to EBITDA) is off the charts:

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