Q2 2024 Investor Audibles: Legacy Ridge Capital, Kathmandu Capital, Alluvial Capital

Episode Summary

Executive Summary: The transcript is a roundup of investor letters from MacroOps and three funds, emphasizing disciplined value investing, concentration, and patience. It highlights strong results in cyclical, special-situation, and asset-backed names despite a market dominated by AI mega-caps, while detailing portfolio changes in energy, midstream, casinos, oil, nuclear, banks, and distressed/value turnarounds.

Main Topics: MacroOps positioning and investor pitch (Priority: 3/5): Brandon opens by promoting MacroOps’ high-risk-adjusted return focus, research resources, and community, positioning the service as differentiated for serious investors. Legacy Ridge Capital performance and portfolio shifts (Priority: 5/5): Legacy Ridge reports strong H1 2024 results, compares itself to indices and mutual funds, and explains portfolio changes in Vistra, Summit Midstream, and Equitrans/EQT. Kothmandu Capital first-year letter and concentrated global value strategy (Priority: 5/5): Kothmandu discusses flat-to-slightly negative quarterly returns versus benchmarks, market conditions unfavorable to value/small-cap/international strategies, and a fully invested five-position portfolio centered on NagaCorp, oil, Kaspi, and Vusion. Alluvial Capital’s small-cap/value thesis and special situations (Priority: 5/5): Dave Waters argues small-cap underperformance is cyclical, then updates several holdings including NLOP, McBride, Talon, banks, Seneca Foods, Supremex, and Harbor Diversified. Energy and commodities as core opportunity set (Priority: 4/5): Across letters, oil, gas, baseload power, and related assets are treated as attractive due to secular demand, volatility, supply constraints, and undervaluation. Capital allocation, balance-sheet repair, and liquidation value (Priority: 4/5): Several holdings are presented as value realizations driven by debt reduction, asset sales, buybacks, or eventual corporate actions rather than near-term growth.

Key Arguments: Concentrated, high-conviction portfolios can outperform even when they look nothing like the market or index benchmarks. AI-driven mega-cap leadership has made broad market comparisons misleading because returns are increasingly concentrated in a few stocks. For cyclical and asset-heavy businesses, valuation and margin of safety matter more than near-term narrative momentum. Energy, midstream, and baseload power remain attractive because structural electricity demand and supply constraints can support long-term cash flows. Small-cap and value strategies can lag for years, but history suggests mean reversion can eventually reward patience. Special situations with tangible assets, debt reduction, or asset sales can generate attractive returns when investors wait for intrinsic value to be realized. Avoiding leverage and insisting on strong balance sheets reduces permanent capital loss even when short-term volatility is high. Operational turnarounds and buybacks are often superior uses of capital versus dividends when shares trade far below intrinsic value.

Data Points: Legacy Ridge H1 2024 gross return: 25.6% - Reported through June 2024 Legacy Ridge H1 2024 net return: 19.7% - Reported through June 2024, after accrued performance fees S&P 500 return ex-Magnificent Seven: 6.3% - Legacy Ridge letter notes index breadth excluding major AI leaders S&P 500 headline return: 15.3% - Legacy Ridge comparison Legacy Ridge trailing 12-month gross return: 48% - Performance cited in letter Legacy Ridge inception-to-date annualized gross return: 18.3% - Since inception Legacy Ridge inception-to-date annualized net return: 14.5% - Since inception Average cash held: 30% - Legacy Ridge average cash and equivalents over first half of year Vistra share price peak: $107 - Reached high in May after AI/electricity demand narrative Vistra prior trading range: $17 to $26 - After five-plus years of stagnation before re-rating Equitrans acquisition exchange ratio: 0.3504 EQT shares per ETRN share - Announced acquisition by EQT Kothmandu Q2 2024 gross return: 0.13% - Quarterly return before fees Kothmandu Q2 2024 net return: -0.4% - Quarterly return after fees Kothmandu since-inception gross return: 22.07% - Since inception Kothmandu since-inception net return: 16.61% - Since inception Kothmandu benchmark return: 22.3% S&P 500; 18.98% MSCI total return - Since inception comparisons Schiller P/E ratio: 36.1x - Market valuation cited in Kothmandu commentary Share of S&P 500 outperforming the market YTD: 24% - Historical low cited in Kothmandu commentary NagaCorp tourism recovery: Chinese tourism up 50% YoY to ~30% of 2019 levels - Kothmandu due diligence on Cambodia casino traffic Phnom Penh airport arrivals: 10% YoY to 78% of 2019 - Kothmandu due diligence Oil price range during quarter: $73.25 to $86.91 - Kothmandu oil basket update Alluvial Fund Q2 return: 3.9% - Quarterly performance Alluvial year-to-date return: 10.4% - Year-to-date performance Small-cap lag versus S&P over 5 years: Nearly 50% behind - Alluvial market commentary NLOP annualized base rents: $105 million - Alluvial net lease office property update NLOP enterprise value cap rate: 17.9% - Market valuation described as dirt cheap NLOP term loan and mezz debt reduction: 47% - Since public spin-off NLOP total net obligations decline: 63% - Over four years at Alluvial McBride market cap: $227 million - Alluvial turnaround holding McBride enterprise value: $359 million - Alluvial turnaround holding McBride trailing operating income multiple: 5.4x - Valuation cited McBride EBITDA multiple: 4.4x - Valuation cited Talon nuclear asset capacity: 2.5 GW - Susquehanna Steam Electric Station ownership United Bank Corp. share performance: Up 19% YTD and 70% from average cost - Alluvial community bank holding Supremex share repurchases: 0.4% to 0.6% of outstanding shares monthly - Buyback pace cited

Pivotal Quotes: "Our primary focus is on absolute returns, and we will consider ourselves successful if we're able to outperform the market's historical long term average call it twelve ish per cent." — Christopher P. Kelly, Legacy Ridge Capital: Explaining the fund’s performance goals and why relative index comparisons are secondary "The IPPs are an uninvestable for most money managers, so there we are. When they become investable, we'll probably be long gone." — Christopher P. Kelly, Legacy Ridge Capital: Describing why independent power producers offered an attractive opportunity before the market rerated them "When the wonderful returns produced by an asset class or a market sector lead to a mass of investors to exclaim with one Voice, why invest in anything else? The shrewd investor will question this consensus." — Dave Waters, Alluvial Capital: Arguing that extreme popularity in mega-cap and large-cap stocks can create future opportunities elsewhere

Implications: The letters suggest patience and valuation discipline remain powerful edges in overheated markets. Investors may find better risk-adjusted returns in overlooked, asset-backed, and operationally improving businesses than in crowded mega-cap growth names.