Investor Letter - First Quarter 2009
Positive Returns In A Down Market
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Dear Clients and Friends,
While market volatility of late 2008 continued through the first three months of 2009, we exceeded our primary goal of protecting client capital in a difficult investment environment. We produced positive returns for our composite of client accounts during the quarter (see below), while the S&P 500 dropped 11%. We continue to deliver on our investment goal of keeping up in good markets and protecting client capital in bad ones.
Despite the economic downturn, we continue to grow assets and add accounts. We believe our conservative approach and investment results have increased our clients' comfort level during these unsettling times.
As we prepare to mark the sixth anniversary of Hurley Capital, we have scheduled a client appreciation cocktail party for mid-May in New York. Keep an eye out for the invitation. We appreciate your confidence in us and thank you for your steady stream of referrals.
Sincerely,
Charles Goldblum, CFA
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Hurley Capital Composite Rises
For the first quarter of 2009, the Hurley Capital Core Equity Composite of accounts managed by Hurley Capital rose 1.3% after all fees and expenses. In comparison, the S&P 500 total return was negative 11.0%.
Since inception (August 2003), we've provided total cumulative returns after fees in excess of 53%, while the S&P 500 total return is down over 11%.
Year-to-date outperformance was due to three factors:
(1) Pipeline Partnerships: Enbridge Energy Partners and Boardwalk Pipeline Partners each rose over 10% during the quarter as investors were attracted to the 9%+ tax-deferred yields and were less nervous about long-term financing needs.
(2) Bank Loan Exchange Traded Fund: Senior loans to a variety of firms rose in the first quarter as investors were attracted to high yields along with high security. We are exposed to this sector via the Eaton Vance Senior Floating Rate ETF, which rose 7% during the quarter and paid a 2.5% dividend as well.
(3) Technology Investments: A new position in MSC Software rose over 25% in the quarter and our existing position in Jacada rose over 12%. Furthermore, our investment in Lawson Software convertible debentures, which we discussed in our last newsletter continue to rise in price, while we receive our 2.5% interest.
Negatives this quarter were led by Loews Corp., which dropped on diminished value across their portfolio of economically-sensitive investments, the Vanguard Heath Care ETF, and Walmart.
Comparison Of Change In Value
of $10,000 Investment, Net Of Fees
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Media Mention In Best Life Magazine
We are featured in the April issue of Best Life Magazine.
The article focuses on Nassim Taleb, investor and author of "Fooled By Randomness" and "The Black Swan". We've excerpted our section and put it on the front page of this pdf. For a good laugh, be sure to read the line after the highlighted section on page 3 of the article.
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Reality Versus Expectations
Investment opportunities are made when reality and expectations don't match. The market usually extrapolates historical trends to continue well after they appear to have ended by overvaluing former high growers or vice versa.
When a current trend is undervalued in a stock, investors stand to benefit from:
(1) the company's growing earnings:
Take a $20 stock trading at 10x its expected $2 per share of earnings. If expectations rise to $2.50, at 10x multiple the stock should rise to $25.
(2) a growing valuation as the market appreciates the trend's effect on a
company's performance.
Should the multiple on the above example rise to 12x from 10x, the stock will rise to $30 (12x $2.50).
- In 2005, while oil prices were in the $50's, oil company earnings expectations were based on oil priced in the $30's. Investors were therefore able to buy oil companies at discounted valuations, so long as oil prices didn't fall, and stood to get a windfall if oil prices rose. As we all know, oil prices rose and earnings and share prices for oil companies followed.
- The inverse is true for overvalued trends. In late 2007, we shorted Choice Hotels because expectations (and valuation) were high for a company that, in reality, faced an already difficult economy that would reduce their leisure travel to their core franchised hotel brands. As these negative trends played out, both earnings and valuation dropped, and the stock fell over 30%.
Recent Investment: Salesforce.com (Short Sale)
We believe Salesforce.com is an example where expectations exceed reality. Salesforce.com sells software so salespeople can manage their business contacts, schedules, documents, etc. From everything we've heard, it's a great product - it's available online and Salesforce.com maintains the technology, the database, everything - all a user needs to do is log on. With the economy not doing so well, we anticipate there will be fewer salespeople employed in 2009 versus 2008. Fewer salespeople should mean fewer users of Salesforce.com's software. Here's how it may play out...
Salesforce.com is a growth company and has been growing like Topsy for ten years. We anticipate 2008's decelerating growth to continue in 2009 that will (1) produce results lower than expectations and (2) cause the company's valuation to decline. Furthermore, Salesforce.com's tax-loss carryforwards run out this year. That's a fancy of way of saying that after years of not paying taxes because of prior losses, the company will start paying cash taxes this year. This will hurt their cash flow relative to last year.
At recent prices, Salesforce.com has a 4.4% free cash flow yield, based on 2008 results. That means that if the company distributed all the cash generated last year, investors would have received a 4.4% yield. We expect 2009 cash flow to be lower than 2008 and believe that investors will require a higher cash flow yield (lower price) should cash flow fall. The confluence of these two expectations could cause Salesforce.com stock to fall 30% or more.
The main risks are: (1) economy may rebound faster than we think, (2) strong companies may outperform for longer than expected, (3) the company may get acquired as a larger firm looks to beef up their product suite (see IBM possibly buying Sun Micro), (4) we are not alone in betting against Salesforce.com - fully 10% of the outstanding shares are being shorted by investors hoping for a decline in the stock. Oftentimes, heavily shorted names go up sharply forcing some of the weaker short-sellers to cover their short (buy the stock), thereby pushing the stock even higher. This is called a 'short squeeze.'
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What To Watch For
We continue to spend our time building and maintaining conservative, value-oriented portfolios for our clients; talking to companies, their suppliers, customers and competitors. Our results to date reaffirm our strategy and we strive to continue providing good risk-adjusted returns for clients over the long-term. For more information on Hurley Capital, including previous newsletters, please visit our website: Hurley Capital.
As you know, we are always available to discuss any additional concerns you may have during this volatile period.
Sincerely,
Charles Goldblum, CFA
Hurley Capital
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Important Disclosure
The performance results presented herein reflect the performance of all actual client accounts invested in the Hurley Capital Core Equity Composite from inception (August 31, 2003) to September 30, 2008. The Hurley Capital Core Equity Composite allocates client portfolios in equity and fixed income investments, weighted according to Hurley Capital's proprietary investment strategy. Actual client accounts utilizing the Hurley Capital Core Equity Composite may have varying allocations between equities and fixed income investments based on individual investment preferences. The performance results of the Hurley Capital Core Equity Composite are net-of-fees, brokerage commissions, and other expenses and include the reinvestment of dividends and capital gains.
Past performance of the Hurley Capital Core Equity Composite may not be indicative of future results and the performance of a specific individual client account may vary substantially from the composite results presented herein in part because client accounts may be allocated among several portfolios. Hurley Capital makes no representation that the results presented herein reflect the typical experience of a Hurley Capital client nor that current or prospective clients will experience similar results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.
Comparison of the Hurley Capital Core Equity Composite to the S&P 500 Index is for illustrative purposes only and the volatility of the S&P 500 Index may be materially different from the volatility of the Hurley Capital Core Equity Composite due to varying degrees of diversification and/or other factors. . Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.
Reference to the specific securities stated herein are for illustrative purposes only and are not being referenced as a favored investment of Hurley Capital. Hurley Capital is under no obligation to hold any equity position for any time period and Hurley Capital's current recommendations are subject to change at any time without notice. The securities mentioned herein should not be considered as personalized investment advice and should not be construed as an endorsement, solicitation or recommendation to purchase or sell any security. A complete list of Hurley Capital's current recommendations is available upon request. This newsletter is a publication of Hurley Capital, LLC. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change.
Hurley Capital, LLC ("Hurley Capital") is an SEC registered investment adviser with its principal place of business in the State of New York. Hurley Capital and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which Hurley Capital maintains clients. Hurley Capital may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by Hurley Capital with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Hurley Capital, please contact Hurley Capital or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
For additional information about Hurley Capital, including fees and services, send for our disclosure statement as set forth on Form ADV from Hurley Capital using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
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Hurley Capital, LLC
Core Equity CompositeAnnual Disclosure Presentation
Core Equity Composite contains fully discretionary core equity accounts and for comparison purposes is measured against the S&P 500. Since inception, the minimum account size for this composite has been $50 thousand.
Hurley Capital, LLC has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPSŪ).
Hurley Capital, LLC is an independent registered investment adviser with the states of New York and Connecticut. The firm maintains a complete list and description of composites, which is available upon request.
Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Prior to August 2004, the composite had 100% non-fee paying accounts in the composite. Composite performance is presented net of foreign withho.lding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor's domicile. Leverage/Derivatives may make up a material part of the comp.osite strategy which includes short selling, with the short position covered by cash accounts that are marked to market on a daily basis. Past performance is not indicative of future results.
The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using actual management fees. The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Additional information regarding the policies for calculating and reporting returns is available upon request.
The investment management fee schedule for the composite is 1.5% on the first $2 million, and negotiable thereafter, or 1% on all balances plus 10% of annual investment gains, subject to high-water marks. Actual investment advisory fees incurred by clients may vary.
The Core Equity Composite was created August 31, 2003. Hurley Capital, LLC's compliance with the GIPS standards has been verified for the period of August 31, 2003 through December 31, 2008 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on Core Equity Composite beginning August 31, 2003. A copy of the verification report is available upon request.
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