Q2 2023 Investor Audibles: Alluvial Capital, Laughing Water Capital, Cedar Creek Capital

Episode Summary

Executive Summary: The transcript is a compilation of Q2 2023 investor letters from multiple microcap-focused value funds. Across the letters, managers emphasize disciplined bottom-up investing in obscure, illiquid, and often misunderstood businesses, with a strong preference for cash flow, special situations, and catalysts over macro forecasting. Major themes include bank opportunities tied to ESIP capital, expert-market dislocations, and valuation gaps in industrials, software, and asset-light businesses.

Main Topics: Value investing amid a narrow, momentum-driven market (Priority: 5/5): Managers argue that the market is rewarding a small group of mega-cap or hyper-growth stocks while leaving many profitable small caps and special situations deeply mispriced. They see the dislocation as an opportunity, not a warning to retreat. Alluvial Capital: concentrated small-cap and special-situation portfolio (Priority: 5/5): Dave Waters highlights holdings such as P10, Unidata, RAND Worldwide, Crawford United, bank baskets, Logistec, Performed Line Products, and Mechanics Bank. The emphasis is on cheap, cash-generative businesses with identifiable catalysts like index inclusion, acquisitions, and sale processes. Laughing Water Capital: business quality over recession forecasting (Priority: 5/5): Matt Sweeney argues that predicting recessions is mostly useless and that investors should focus on normalized earnings power, management quality, and valuation. He discusses APG, CDMO, HGV, Lifecore, Thrive, Vistry, Transact, and Enzo Biochem as examples of businesses with specific operational catalysts. Expert market opportunities and liquidity dislocations (Priority: 5/5): Both Cedar Creek and Alluvial highlight the OTC expert market as a source of unusual bargains created by SEC Rule 15c2-11. Cedar Creek’s Propel Media position is the standout example, while Alluvial notes Mechanics Bank as a high-conviction illiquid special situation. Banks and ESIP capital as hidden optionality (Priority: 4/5): Multiple letters describe banks that received Treasury ESIP capital, which can be used to expand balance sheets and magnify common equity returns. The managers stress low price-to-book multiples, strong credit, and the prospect of future earnings power once near-term sector fears fade. Industrial, infrastructure, and electrification tailwinds (Priority: 4/5): Several holdings benefit from long-duration infrastructure spending, electrification, broadband expansion, and housing partnerships. Examples include Hammond Power, Performed Line Products, API Group, Vistry, and Crawford United. Catalysts, activism, and corporate actions (Priority: 4/5): The letters repeatedly identify catalysts such as sale processes, activist pressure, board changes, buybacks, and spin-off potential. These are presented as ways to unlock value in businesses the market is currently mispricing.

Key Arguments: The market is overly concentrated in a small number of large stocks, creating mispricing in small caps and special situations. Macro forecasting, especially recession calls, is less useful than analyzing valuation, business quality, and catalysts. Illiquid securities and expert-market names can trade far below intrinsic value because of structural neglect rather than weak fundamentals. ESIP-funded banks have unusually attractive economics because the Treasury capital can support balance-sheet growth and higher common equity returns. Businesses with recurring revenue, pricing power, and operational improvements can rerate over a 3-5 year horizon even if near-term sentiment stays poor. Corporate actions such as sales processes, buybacks, and activist involvement can provide asymmetric upside in underfollowed securities. Infrastructure, electrification, and asset-light housing themes provide durable long-term demand for select industrial and service businesses.

Data Points: Alluvial Q2 return: 9% - Alluvial Fund performance in Q2 2023 Alluvial benchmark return - Russell 2000: 5.3% - Comparison cited in Dave Waters' letter Alluvial benchmark return - Russell MicroCap: 4.8% - Comparison cited in Dave Waters' letter P10 fundraise: almost $800 million - RCP Advisors secondary opportunity fund 4 P10 target: $500 million - Original fundraising target Crawford revenue growth: from $24 million in 2017 to a run rate of $160 million - Crawford United business expansion Crawford Q1 earnings: 97 cents per share - Quarterly performance cited by Dave Waters Crawford net debt: $18 million - Down from $25 million at end of 2021 Logistec potential sale price: at least $90 per share - Expected transaction value in sale process Logistec estimated value: in excess of $100 per share - Dave Waters' intrinsic value estimate Performed Line owned real estate: around $300 million - Estimated property value supporting the thesis Mechanics Bank share price: just over $23,000 - Expert-market trading level described as undervalued Mechanics Bank expected exit value: no less than $40,000 per share - Waters’ future valuation expectation Laughing Water Q2 return: approximately 13.8% after fees - Matt Sweeney performance for Q2 2023 Laughing Water year-to-date return: approximately 22.4% - YTD return through Q2 2023 S&P 500 Q2 return: 8.7% - Benchmark comparison in Laughing Water letter Russell 2000 Q2 return: 5.2% - Benchmark comparison in Laughing Water letter API Group recurring inspection growth: double digit pace - Core recurring fire-safety inspection business CDMO late-stage signings increase: 34% - Avid Bioservices update HGV new repurchase authorization: $500 million - Share repurchase plan announced in May Lifecore value-upside estimate: 40% to 200% higher - Potential buyout range described by Matt Sweeney Vistry mortgage rate context: 15-year high - UK macro backdrop for homebuilder thesis Cedar Creek Q2 return: -2.5% - Tim Erickson performance for the quarter Cedar Creek first-half return: 3.7% - Performance through June 30, 2023 Cedar Creek average annual return: 14% - 17.5-year track record net of fees Cedar Creek cumulative return since inception: 883.9% - Since January 2006 Fund value at June 30 holdings: 5x expected earnings for the coming year - Cedar Creek portfolio valuation Cedar Creek expert market exposure: 37% of fund - Up from 27% at the start of the quarter Propel Media purchase price: 24 to 25 cents per share - Accumulated in expert market after takeover rumor Propel Media implied acquisition value: $2.77 to $3.17 per share - Based on reported $700-$800 million deal range Propel Media potential gain: about 12x cost basis - If acquisition closes near reported terms Citizens Bank annualized earnings: approximately $7 per share - Against a $42 share price MF Bank cost basis: under $12 - Cedar Creek purchase cost MF Bank Q1 EPS: $0.88 per share - Compared with $0.40 in Q1 2022 Solitron bid price increase: 6% - From $10.10 to $10.70 per share

Pivotal Quotes: "I think it is a very good idea. While investors seem intent on reliving the experiences of 2020 and 2021, I see no shortages of bargains in the large cohort of companies that remain tethered to reality." — Dave Waters: On why small-cap value remains attractive despite speculative market enthusiasm "Trying to predict recessions is mostly a waste of time." — Matt Sweeney: Core framing for why macro forecasts should take a back seat to valuation and business quality "We expected both the seller and buyer to work diligently at alleviating any concerns the FTC had. On July 17th, the FTC announced that they were suing to block the transaction." — Tim Erickson: Propel Media special situation and merger-arbitrage setup

Implications: The letters suggest continued opportunity in neglected small caps, expert-market names, and catalyst-driven special situations. If macro anxiety fades and breadth improves, these portfolios could benefit sharply as earnings power and valuations converge.